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Sourcing Co-Created Products: Should your Suppliers Collaborate?

Author

Listed:
  • Oksana Loginova

    (Department of Economics, University of Missouri)

  • Niladri B. Syam

    (Department of Marketing, Trulaske College of Business, University of Missouri)

Abstract

We investigate the phenomenon of sourcing co-created products. Specifically, we study how a multi-product downstream firm should source from the upstream market, that is single-source versus multi-source, in a situation where the products are co-created with the suppliers. We conceptualize co-creation as investments made at different hierarchical levels aimed at reducing the production costs incurred by the supplies. We also incorporate into our model the downstream firm's decision to establish a collaborative, knowledge-sharing environment for its suppliers. Outright purchase from the upstream market serves as a benchmark. We find that the downstream firm may be worse off when the upstream suppliers collaborate, unless the cross-effect of its and its suppliers' investments is very large. For a commonly used additively separable cost function, we find that the downstream firm's optimal strategy is multi-source co-creation without collaboration. An important economic force that our analysis has uncovered is that single-sourcing of co-created products destroys the downstream firm's incentives to invest. Multi-sourcing softens the holdup problem, leading to a positive level of investment by the downstream firm. Finally, we find that the incentives of the downstream firm to multi-source are stronger for co-created products than for non-co-created products.

Suggested Citation

  • Oksana Loginova & Niladri B. Syam, 2018. "Sourcing Co-Created Products: Should your Suppliers Collaborate?," Working Papers 1811, Department of Economics, University of Missouri.
    • Handle: RePEc:umc:wpaper:1811
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    References listed on IDEAS

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    More about this item

    Keywords

    co-creation; product sourcing; collaboration; holdup;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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