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Market structure and strategic bi-sourcing

  • Beladi, Hamid
  • Mukherjee, Arijit

We provide a new rationale 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. We also show the effects of the product market competition and the implications of different and common outside input suppliers on the profits of the final goods producers. In-house input production reduces the price charged by the outside input supplier, and may make bi-sourcing as a profitable strategy. Under bi-sourcing, the final goods producers may be better off by outsourcing to a common input supplier than by outsourcing to different input suppliers. In the presence of bi-sourcing, the final goods producers may not have the incentive for cooperation in the product market. Our results show that even if the final goods producer's marginal cost of in-house input production is higher than the outside supplier's marginal cost of input production, bi-sourcing makes the consumers better off compared to complete outsourcing.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 82 (2012)
Issue (Month): 1 ()
Pages: 210-219

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Handle: RePEc:eee:jeborg:v:82:y:2012:i:1:p:210-219
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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