The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier
AbstractFirms 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 54 (2008)
Issue (Month): 10 (October)
make-or-buy; strategic outsourcing; supply chains;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Kenneth Fjell & Oystein Foros & Hans Jarle Kind, 2013. "On the Choice of Royalty Rule to Cover Fixed Costs in Input Joint Ventures," CESifo Working Paper Series 4332, CESifo Group Munich.
- Suedekum, Jens & Nowak, Verena & Schwarz, Christian, 2012.
"On the Organizational Structure of Multinational Firms: Which Sourcing Mode for Which Input?,"
IZA Discussion Papers
6564, Institute for the Study of Labor (IZA).
- Verena Nowak & Christian Schwarz & Jens Suedekum, 2012. "On the Organizational Structure of Multinational Firms - Which Sourcing Mode for which Input?," CESifo Working Paper Series 3823, CESifo Group Munich.
- Matsushima, Noriaki & Mizuno, Tomomichi, 2013.
"Vertical separation as a defense against strong suppliers,"
European Journal of Operational Research,
Elsevier, vol. 228(1), pages 208-216.
- Noriaki Matsushima & Tomomichi Mizuno, 2009. "Vertical Separation as a Defense against Strong Suppliers," ISER Discussion Paper 0755, Institute of Social and Economic Research, Osaka University.
- Shy, Oz & Stenbacka, Rune, 2012.
"Efficient organization of production: Nested versus horizontal outsourcing,"
Elsevier, vol. 116(3), pages 593-596.
- Oz Shy & Rune Stenbacka, 2009. "Efficient organization of production: nested versus horizontal outsourcing," Working Papers 09-9, Federal Reserve Bank of Boston.
- Chen, Yutian & Dubey, Pradeep & Sen, Debapriya, 2009.
"Outsourcing induced by strategic competition,"
14899, University Library of Munich, Germany.
- Yutian Chen & Pradeep Dubey & Debapriya Sen, 2006. "Outsourcing Induced by Strategic Competition," Levine's Bibliography 321307000000000674, UCLA Department of Economics.
- Yutian Chen & Pradeep Dubey & Debapriya Sen, 2006. "Outsourcing Induced by Strategic Competition," Cowles Foundation Discussion Papers 1589, Cowles Foundation for Research in Economics, Yale University.
- Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.
- Chen, Yutian & Sen, Debapriya, 2010. "Strategic Outsourcing under Economies of Scale," MPRA Paper 20763, University Library of Munich, Germany.
- Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If references are entirely missing, you can add them using this form.