  How does supply uncertainty affect the structure of supply chain networks? To
answer this question we consider a setting where retailers and suppliers must
establish a costly relationship with each other prior to engaging in trade.
Suppliers, with uncertain yield, announce wholesale prices, while retailers
must decide which suppliers to link to based on their wholesale prices.
Subsequently, retailers compete with each other in Cournot fashion to sell the
acquired supply to consumers. We find that in equilibrium retailers concentrate
their links among too few suppliers, i.e., there is insufficient
diversification of the supply base. We find that either reduction of supply
variance or increase of mean supply, increases a supplier's profit. However,
these two ways of improving service have qualitatively different effects on
welfare: improvement of the expected supply by a supplier makes everyone better
off, whereas improvement of supply variance lowers consumer surplus.
