IDEAS home Printed from https://ideas.repec.org/a/bla/ijethy/v19y2023i1p39-61.html
   My bibliography  Save this article

To make or to buy from a common supplier? Strategic considerations and welfare consequences

Author

Listed:
  • Wei‐Jen Wen
  • Wen‐Chieh Lee
  • Chung‐Yen Lo

Abstract

Consider two downstream firms that each can either produce an input in‐house or purchase it from an upstream supplier. We show that depending on the difference between the supplier's and the downstream firms' in‐house production costs, outsourcing by both firms could help them achieve a Pareto improvement or leave them trapped in a prisoner's dilemma. Furthermore, we find that two downstream firms may play a chicken game in which each makes a sourcing decision different from its rival if the input supplier is not as efficient as in the previous cases. The welfare implications of various sourcing outcomes are explored.

Suggested Citation

  • Wei‐Jen Wen & Wen‐Chieh Lee & Chung‐Yen Lo, 2023. "To make or to buy from a common supplier? Strategic considerations and welfare consequences," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(1), pages 39-61, March.
    • Handle: RePEc:bla:ijethy:v:19:y:2023:i:1:p:39-61
    DOI: 10.1111/ijet.12334
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ijet.12334
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ijet.12334?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Buehler, Stefan & Haucap, Justus, 2006. "Strategic outsourcing revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 325-338, November.
    2. Kabiraj, Tarun & Sinha, Uday Bhanu, 2016. "Strategic outsourcing with technology transfer under price competition," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 281-290.
    3. Gérard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    4. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
    5. Tarun Kabiraj & Uday Bhanu Sinha, 2014. "Strategic Outsourcing with Technology Transfer under Cournot Competition," Economics Bulletin, AccessEcon, vol. 34(2), pages 1133-1140.
    6. Jianqing Chen & Zhiling Guo, 2014. "Strategic Sourcing in the Presence of Uncertain Supply and Retail Competition," Production and Operations Management, Production and Operations Management Society, vol. 23(10), pages 1748-1760, October.
    7. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.
    8. Qi Feng & Lauren Xiaoyuan Lu, 2012. "The Strategic Perils of Low Cost Outsourcing," Management Science, INFORMS, vol. 58(6), pages 1196-1210, June.
    9. Simon Loertscher & Michael H. Riordan, 2019. "Make and Buy: Outsourcing, Vertical Integration, and Cost Reduction," American Economic Journal: Microeconomics, American Economic Association, vol. 11(1), pages 105-123, February.
    10. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    11. Shy, Oz & Stenbacka, Rune, 2003. "Strategic outsourcing," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 203-224, February.
    12. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 383-406.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Colombo, Stefano & Scrimitore, Marcella, 2018. "Managerial delegation under capacity commitment: A tale of two sources," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 149-161.
    2. Kabiraj, Tarun & Sinha, Uday Bhanu, 2016. "Strategic outsourcing with technology transfer under price competition," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 281-290.
    3. Cao, Jiyun & Mukherjee, Arijit & Sinha, Uday Bhanu, 2018. "Firm-asymmetry and strategic outsourcing," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 16-24.
    4. Tarun Kabiraj & Uday Bhanu Sinha, 2017. "Outsourcing under incomplete information," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 10(1), pages 3-15, April.
    5. Uday Bhanu Sinha, 2016. "Economies of Scale and (Non)Existence of Strategic Outsourcing in Cournot Duopoly," Economics Bulletin, AccessEcon, vol. 36(3), pages 1260-1266.
    6. Chen, Yutian & Dubey, Pradeep & Sen, Debapriya, 2011. "Outsourcing induced by strategic competition," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 484-492, July.
    7. Chen Yutian & Sen Debapriya, 2012. "Outsourcing and Downstream R&D under Economies of Scale," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-33, September.
    8. Parenti, Mathieu, 2018. "Large and small firms in a global market: David vs. Goliath," Journal of International Economics, Elsevier, vol. 110(C), pages 103-118.
    9. Bouckaert, Jan & Van Moer, Geert, 2017. "Horizontal subcontracting and investment in idle dispatchable power plants," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 307-332.
    10. Noriaki Matsushima & Laixun Zhao, 2015. "Strategic dual sourcing as a driver for free revealing of innovation," ISER Discussion Paper 0936, Institute of Social and Economic Research, Osaka University.
    11. Deng, Sijing & Fu, Ke & Xu, Jiayan & Zhu, Kaijie, 2021. "The supply chain effects of trade credit under uncertain demands," Omega, Elsevier, vol. 98(C).
    12. Kopel, Michael & Löffler, Clemens & Pfeiffer, Thomas, 2016. "Sourcing strategies of a multi-input-multi-product firm," Journal of Economic Behavior & Organization, Elsevier, vol. 127(C), pages 30-45.
    13. Tarun Kabiraj & Uday Bhanu Sinha, 2011. "Strategic Outsourcing with Technology Transfer," Working papers 203, Centre for Development Economics, Delhi School of Economics.
    14. Yan, Yingchen & Zhao, Qiuhong & Qin, Zhongfeng & Lev, Benjamin, 2022. "Inter-competitor outsourcing: On the advantages of profit and product launching time," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 158(C).
    15. You, Jing & Imai, Katsushi S. & Gaiha, Raghav, 2016. "Declining Nutrient Intake in a Growing China: Does Household Heterogeneity Matter?," World Development, Elsevier, vol. 77(C), pages 171-191.
    16. Xiaole Wu & Fuqiang Zhang & Yu Zhou, 2022. "Brand Spillover as a Marketing Strategy," Management Science, INFORMS, vol. 68(7), pages 5348-5363, July.
    17. Noriaki Matsushima & Laixun Zhao, 2018. "Technology spillovers and outside options in a bilateral duopoly," ISER Discussion Paper 1039, Institute of Social and Economic Research, Osaka University.
    18. Luciano Fanti & Domenico Buccella, 2023. "Vertical industry and strategic trade policy," SN Business & Economics, Springer, vol. 3(2), pages 1-16, February.
    19. Ghosh, Arghya & Saha, Souresh, 2015. "Price competition, technology licensing and strategic trade policy," Economic Modelling, Elsevier, vol. 46(C), pages 91-99.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ijethy:v:19:y:2023:i:1:p:39-61. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1742-7355 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.