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

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Author Info

  • 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)

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    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.

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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0896
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 54 (2008)
    Issue (Month): 10 (October)
    Pages: 1747-1758

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    Handle: RePEc:inm:ormnsc:v:54:y:2008:i:10:p:1747-1758

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    Related research

    Keywords: make-or-buy; strategic outsourcing; supply chains;

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    Cited by:
    1. 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).
    2. Yutian Chen & Pradeep Dubey & Debapriya Sen, 2006. "Outsourcing Induced by Strategic Competition," Levine's Bibliography 321307000000000674, UCLA Department of Economics.
    3. 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.
    4. Shy, Oz & Stenbacka, Rune, 2012. "Efficient organization of production: Nested versus horizontal outsourcing," Economics Letters, Elsevier, vol. 116(3), pages 593-596.
    5. 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.
    6. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.
    7. Tarun Kabiraj & Uday Bhanu Sinha, 2014. "Strategic Outsourcing with Technology Transfer under Cournot Competition," Economics Bulletin, AccessEcon, vol. 34(2), pages 1133-1140.
    8. Chen, Yutian & Sen, Debapriya, 2010. "Strategic Outsourcing under Economies of Scale," MPRA Paper 20763, University Library of Munich, Germany.
    9. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.

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