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On the Irrelevance of Input Prices for Make-or-Buy Decisions

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Author Info
David E. M Sappington

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Abstract

This paper demonstrates that input prices need not reflect the costs of an efficient incumbent supplier in order to induce entrants to implement efficient make-or-buy decisions. Because of strategic downstream considerations, entrants may always undertake efficient make-or-buy decisions, regardless of the prices at which they are authorized to buy key inputs from incumbent suppliers.

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File URL: http://hdl.handle.net/10.1257/000282805775014344
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=95&issue=5&article=14&issue_date=December2005
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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 5 (December)
Pages: 1631-1638
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Handle: RePEc:aea:aecrev:v:95:y:2005:i:5:p:1631-1638

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
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  2. Kondaurova, Irina & Weisman, Dennis L., 2003. "Incentives for non-price discrimination," Information Economics and Policy, Elsevier, vol. 15(2), pages 147-171, June. [Downloadable!] (restricted)
  3. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June. [Downloadable!] (restricted)
  4. David L. Kaserman & John Mayo, 2002. "The Supreme Court Weighs in on Local Exchange Competition: The Meta-Message," Review of Network Economics, Concept Economics, vol. 1(2), pages 119-131, September. [Downloadable!]
  5. Gregory L. Rosston & Roger G. Noll, 2002. "The Economics of the Supreme Court's Decision on Forward Looking Costs," Review of Network Economics, Concept Economics, vol. 1(2), pages 81-89, September. [Downloadable!]
  6. David M. Mandy & William W. Sharkey, 2003. "Dynamic Pricing and Investment from Static Proxy Models," Review of Network Economics, Concept Economics, vol. 2(4), pages 404-439, December. [Downloadable!]
  7. Sibley, David S. & Weisman, Dennis L., 1998. "Raising rivals' costs: The entry of an upstream monopolist into downstream markets," Information Economics and Policy, Elsevier, vol. 10(4), pages 451-470, December. [Downloadable!] (restricted)
  8. Mandy, David M, 2002. "TELRIC Pricing with Vintage Capital," Journal of Regulatory Economics, Springer, vol. 22(3), pages 215-49, November. [Downloadable!] (restricted)
  9. Jerry A. Hausman, 1997. "Valuing the Effect of Regulation on New Services in Telecommunications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997-1), pages 1-54. [Downloadable!]
  10. Dennis L. Weisman, 2002. "Did The High Court Reach An Economic Low In Verizon v. FCC?," Review of Network Economics, Concept Economics, vol. 1(2), pages 90-105, September. [Downloadable!]
  11. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Blackwell Publishing, vol. 44(2), pages 131-50, June. [Downloadable!] (restricted)
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  12. Beard, T Randolph & Kaserman, David L & Mayo, John W, 2001. "Regulation, Vertical Integration and Sabotage," Journal of Industrial Economics, Blackwell Publishing, vol. 49(3), pages 319-33, September. [Downloadable!] (restricted)
  13. Gary Biglaiser & Michael Riordan, 2000. "Dynamics of Price Regulation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 744-767, Winter.
  14. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790.
  15. Mark Armstrong, 2001. "Access Pricing, Bypass, and Universal Service," American Economic Review, American Economic Association, vol. 91(2), pages 297-301, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. R. Cellini & L. Lambertini, 2007. "The make-or-buy choice in a mixed oligopoly: a theoretical investigation," Working Papers 618, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
    Other versions:
  2. Philip G. Gayle & Dennis L. Weisman, 2007. "Efficiency Trade-Offs in the Design of Competition Policy for the Telecommunications Industry," Review of Network Economics, Concept Economics, vol. 6(3), pages 321-341, September. [Downloadable!]
  3. G. Rossini & C. Vergari, 2009. "Input production joint venture," Working Papers 673, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
  4. David Mandy, 2009. "Pricing inputs to induce efficient Make-or-Buy decisions," Journal of Regulatory Economics, Springer, vol. 36(1), pages 29-43, August. [Downloadable!] (restricted)
  5. David Sappington & Burcin Unel, 2005. "Privately-Negotiated Input Prices," Journal of Regulatory Economics, Springer, vol. 27(3), pages 263-280, 01. [Downloadable!] (restricted)
  6. David Mandy, 2007. "When Do Input Prices Matter For Make-Or-Buy Decisions?," Working Papers 0701, Department of Economics, University of Missouri. [Downloadable!]
  7. Troy Quast, 2008. "Do elected public utility commissioners behave more politically than appointed ones?," Journal of Regulatory Economics, Springer, vol. 33(3), pages 318-337, June. [Downloadable!] (restricted)
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