Automotive Procurement Under Opaque Prices: Theory with Evidence from the BMW Supply Chain.

This article focuses on automotive procurement contracts, analyzing how information asymmetry in raw material costs and market factors influence an automaker's choice between fixed-price (FP) and material-plus-surcharge (MPS) contracts. Using a dynamic procurement model tailored to BMW's supply chain and validated with proprietary BMW data, the study finds that MPS contracts are preferred when raw materials are exchange traded and cost information is symmetric, while FP contracts are favored under asymmetric information, especially when demand is inelastic, supplier R&D and tooling costs are low, or raw material cost variability is high. The authors identify that existing contracts are suboptimal under asymmetric information and propose a novel two-part tariff contract with ex ante quantity commitments and an ex post price-quantity menu that better screens supplier cost information. Numerical calibration suggests this optimal contract could improve automaker profits by up to 6%, particularly for price-elastic vehicle models using volatile, non–exchange-traded raw materials.