When Do Input Prices Matter For Make-Or-Buy Decisions?
AbstractWe investigate input pricing regimes that induce efficient make-or-buy decisions by entrants when there is constant returns in the production of the input(s) and simultaneous noncooperative price competition in downstream retail markets. A necessary and sufficient condition for efficient make-or-buy decisions is derived. This condition shows that input prices are relevant for make-or-buy decisions except under restrictive and often unverifiable assumptions on the demand structure, and that the least informationally-demanding way to ensure efficient make-or-buy decisions is to price inputs at marginal cost. The extent to which input prices can depart from marginal cost while still inducing efficient make-or-buy decisions depends on the relative efficiency of the incumbent and the demand displacement ratio, with significant departures possible even for modest efficiency differences when products are nearly homogeneous.
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Bibliographic InfoPaper provided by Department of Economics, University of Missouri in its series Working Papers with number 0701.
Length: 14 pgs.
Date of creation: 16 Jan 2007
Date of revision:
Input Pricing Policy; Productive Efficiency.;
Find related papers by JEL classification:
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
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