Faculty of Business Administration
Visiting Scholar Seminar
The Bright Side of Price Volatility in Global Commodity Procurement
Liming LIU
College of Business
Southern University of Science and Technology
Time/Date: 10:30am – 11:30am, 12 August 2022
Venue: E22-3016
Abstract
We study two competing firms’ contract selection decisions between the fixed price contract (FPC) and Contingent-price contract (CPC) in global commodity procurement. The CPC price is contingent on an underlying index price, which correlates with the local market demand of the commodity. This correlation allows firms to use demand information to update their believe on the CPC price. With two-dimensional information updating, we identify a response effect of the CPC, which enables a firm to adjust the order quantity according to its updated belief on both demand and CPC price. Contrary to conventional wisdom, we find that a larger price volatility can benefit the firms, and furthermore, a firm may benefit from its rival’s forecast accuracy improvement when differentiated contracts are adopted. We further show that the response effect plays a critical role in the firms’ contract choices. First, a large price volatility forces the firms to seek the responsiveness of the CPC. Second, the firms may adopt differentiated contracts to improve their responses to demand changes and dampen competition; and a higher competition intensity more likely leads to contract differentiation. Third, the firms in a small market pursue responsiveness and contract differentiation rather than cost efficiency. This study reveals the bright side of price volatility and takes a step toward understanding the effect of two-dimensional information updating.
Biography
Prof. Liming LIU is a chair professor at the College of Business, Southern University of Science and Technology (Sustech). He was a chair professor at the Faculty of Business, Lingnan University (Hong Kong) between 2011 and 2020, and served as the Dean between 2014 and 2019. Before joining Sustech in August 2021, he worked as a visiting chair professor at the Faculty of Business, Hong Kong Polytechnic University. His research areas include supply chain management, inventory theory, logistics, healthcare management, and queueing systems. His works appear in Queueing Systems, EJOR, Management Science, Operations Research, MSOM, and POMS.
