Supply diversification with isoelastic demand

We study a firm׳s sourcing strategy when facing two unreliable suppliers and a price-dependent isoelastic demand. At optimality, the firm always orders at least from the low-cost supplier. The firm also orders from the high-cost supplier if and only if the effective purchase cost from the low-cost supplier is greater than the actual purchase cost from the high-cost supplier. We also find that when the firm orders from both suppliers, the total order quantity decreases as the correlation between the suppliers׳ capacities increases.