We provide a theoretical justification for bi-sourcing, which refers to the situation where a final goods producer buys an input from an outside supplier and also produces it in-house. Bi-sourcing occurs if the marginal cost of producing the input in-house is higher than the marginal cost of outside input supplier. In-house input production helps to reduce the input price charged by the outside supplier, and may make bi-sourcing as a profitable strategy. We show that bi-sourcing can be a profitable strategy under both monopoly and product market competition. The incentive for bi-sourcing depends on the product market and outside input market competition. Our result suggests that certain amount of input production with a relatively high-cost technology can make the consumers better off compared to the situation where the entire inputs are produced with a low-cost technology.
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Paper provided by University of Nottingham, School of Economics in its series Discussion Papers with number
08/06.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Jay Pil Choi & Carl Davidson, 2004.
"Strategic Second Sourcing by Multinationals,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 579-600, 05.
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