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The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier

Author

Listed:
  • Anil Arya

    (Fisher College of Business, Ohio State University, Columbus, Ohio 43210)

  • Brian Mittendorf

    (School of Management, Yale University, New Haven, Connecticut 06520)

  • David E. M. Sappington

    (Department of Economics, University of Florida, Gainesville, Florida 32611)

Abstract

Firms routinely decide whether to make essential inputs themselves or buy the inputs from independent suppliers. Conventional wisdom suggests that a firm will not buy an input for a price above its in-house cost of production. We show that this is not necessarily the case when a monopolistic input supplier also serves the firm's retail rival. In this case, the decision to buy the input (and thus become one of the supplier's customers) can limit the incentive the supplier would otherwise have to provide the input on particularly favorable terms to the retail rival. Thus, a retail competitor may pay a premium to outsource production to a common supplier in order to raise its rivals' costs.

Suggested Citation

  • Anil Arya & Brian Mittendorf & David E. M. Sappington, 2008. "The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier," Management Science, INFORMS, vol. 54(10), pages 1747-1758, October.
    • Handle: RePEc:inm:ormnsc:v:54:y:2008:i:10:p:1747-1758
    DOI: 10.1287/mnsc.1080.0896
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    References listed on IDEAS

    as
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