Strategic Formation and Reliability of Supply Chain Networks
We study the incentives that independent self-interested agents have in forming a resilient supply chain network in the face of disruptions and competition. Competing suppliers are subject to yield uncertainty and congestion. Competing retailers make sourcing decisions based on price and reliability. Under yield uncertainty only, retailers---benefiting from supply variance---concentrate their links on a single supplier, counter to the idea that they should mitigate yield uncertainty by multi-sourcing. When congestion is added, the resulting networks resemble bipartite expanders known to be resilient, thus, providing the first example of endogenously formed resilient supply chains.