Quality Testing and Product Rationing by Input Suppliers

Arya, A and Gong, N and Ramanan, R N V (2014) Quality Testing and Product Rationing by Input Suppliers. Production and Operations Management, 23 (11). pp. 1835-1844. ISSN 1059-1478

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Quality testing by suppliers has significant ramifications for downstream supply chain participants and retail consumers. This article focuses on such implications accounting for the fact that suppliers often enjoy discretion in quality testing and reporting. Under a discretionary testing and reporting environment, we show that a supplier can improve the market's perception of product quality by engaging in self-imposed production cuts. Production cuts dampen supplier incentives to engage in excessive quality testing, putting the supplier and the market on a more equal information footing. This reduces the market's need to skeptically discount product quality to protect itself. The improved market perception, then, reduces quality testing demand, introducing cost savings. The result that costly production cuts can improve quality perceptions indicates that the groundwork for influencing market perceptions may have to be laid upfront, even prior to acquiring private information, providing a contrast to routine signaling models.

Item Type: Article
Additional Information: The research paper was published by the author with the affiliation of University of California
Subjects: Finance
Date Deposited: 06 Aug 2023 18:06
Last Modified: 06 Aug 2023 18:06
URI: https://eprints.exchange.isb.edu/id/eprint/1858

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