What factors determine the number of trading partners?

The purpose of this paper is to provide a simple model to explain buyer-supplier relationships and identify factors that determine the chosen number of trading partners. We show that the optimal number of partners for a supplier is small, if it has low bargaining power, moderate economies of scope in variable costs, and large sunk investment. We extend the model by incorporating the supplier's quality investment and show that the investment level can be higher when the number of trading partners is small. The results may be consistent with the formation of Japanese buyer-supplier relations.