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Make vs Buy in a Monopoly with Demand or Cost Uncertainty

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  • L. Lambertini

Abstract

The issue of technical progress under uncertainty is nested into the debate on vertical integration versus outsourcing, to show that, in general, the former is preferable to the latter in terms of both expected profits and technological efficiency. It is then shown that there exist (i) an optimal two part tariff where the unit price set by the upstream firm is conditional upon its R&D effort, and (ii) an optimal contract specifying the input price in terms of the initial capabilities of the sub-contractor, whereby the industry replicates the same performance as the vertically integrated firm as for both profits and R&D efforts.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 671.

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Date of creation: May 2009
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Handle: RePEc:bol:bodewp:671

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  1. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 2005, Harvard - Institute of Economic Research.
  2. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers, C.E.P.R. Discussion Papers 70, C.E.P.R. Discussion Papers.
  3. Georges Zaccour, 2006. "On Coordination of Dynamic Marketing Channels and Two-part Wholesale Tariff," Computing in Economics and Finance 2006, Society for Computational Economics 250, Society for Computational Economics.
  4. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, American Economic Association, vol. 90(5), pages 1239-1254, December.
  5. Garvey, Gerald T & Pitchford, Rohan, 1995. "Input Market Competition and the Make-or-Buy Decision," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 4(3), pages 491-508, Fall.
  6. Perry, Martin K., 1989. "Vertical integration: Determinants and effects," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 4, pages 183-255 Elsevier.
  7. repec:hrv:faseco:4784029 is not listed on IDEAS
  8. Futia, Carl A, 1980. "Schumpeterian Competition," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 94(4), pages 675-95, June.
  9. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, American Economic Association, vol. 61(2), pages 112-23, May.
  10. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 85-120, February.
  11. Katz, Michael L., 1989. "Vertical contractual relations," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 11, pages 655-721 Elsevier.
  12. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, American Economic Association, vol. 62(3), pages 278-91, June.
  13. Paul Klemperer & Margaret Meyer, 1986. "Price Competition vs. Quantity Competition: The Role of Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 618-638, Winter.
  14. Steven Tadelis, 2002. "Complexity, Flexibility, and the Make-or-Buy Decision," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 433-437, May.
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