Procurement System and Competitive Advantage

Abstract

We examine which type of assembler－American-type or Japanese-type－will occupy a dominant position in a duopoly competition. An American-type assembler such as GM produces the parts internally, while a Japanese-type such as Toyota purchases them from its affiliated (keiretsu) supplier. This subject is also related to an institutional choice of boundaries of the firm, which affects firms’ competitiveness. In an affiliated procurement system, it is usual for a parent firm to support its affiliated supplier in various ways prior to purchasing the parts. The support can work as a commitment device that enables the parent firm to purchase the parts at a low price. Subsequently, the low price of the intermediate good gives the parent firm a competitive advantage in the final product market.