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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 vs 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.

Suggested Citation

  • L. Lambertini, 2009. "Make vs Buy in a Monopoly with Demand or Cost Uncertainty," Working Papers 671, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:671
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    References listed on IDEAS

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    1. Steven Tadelis, 2002. "Complexity, Flexibility, and the Make-or-Buy Decision," American Economic Review, American Economic Association, vol. 92(2), pages 433-437, May.
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    1. Constantine Manasakis & Emmanuel Petrakis & Vasileios Zikos‡, 2014. "Downstream Research Joint Venture with Upstream Market Power," Southern Economic Journal, John Wiley & Sons, vol. 80(3), pages 782-802, January.

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