IDEAS home Printed from https://ideas.repec.org/a/ege/journl/v12y2012ip1-8.html
   My bibliography  Save this article

Product Differentiation and the Irrelevancy of Input Prices for Make-or-Buy Decisions

Author

Listed:
  • M. Burak ONEMLI

    () (Kansas State University, Department of Statistics)

Abstract

Mandatory network unbundling is perhaps one of the foremost topics in regulatory economics today. The concept has crucial importance in the deregulation of many previously regulated industries including telecommunications, gas, electricity and railroads. Moreover, the topic has emerged as one of the more prominent issues associated with the implementation of the 1996 Telecommunication Act in the United States. Upon initial examination, establishing the correct costing standards and/or determining the correct input prices would seem important for sending the correct price signals to the entrants for their efficient make-or-buy decisions. However, Sappington uses a standard Hotelling location model to show that input prices are irrelevant for an entrant’s make or buy decision. In this study, we show that this result is closely related to the specific conditions of the Hotelling framework. Specifically, it is shown that input prices are irrelevant when firms produce homogeneous products, but are relevant for make-or-buy decisions when the entrant and incumbent produce differentiated products under Bertrand price competition fra-mework. These results suggest that, in general, it is important for regulators to set correct prices in order to not distort the entrants’ efficient make-or-buy decisions.

Suggested Citation

  • M. Burak ONEMLI, 2012. "Product Differentiation and the Irrelevancy of Input Prices for Make-or-Buy Decisions," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 12(1), pages 1-8.
  • Handle: RePEc:ege:journl:v:12:y:2012:i::p:1-8
    as

    Download full text from publisher

    File URL: http://www.onlinedergi.com/MakaleDosyalari/51/PDF2011_2_1.pdf
    Download Restriction: no

    File URL: http://onlinedergi.com/arsiv/arsivDetay.aspx?yil=2012&peryot=1
    File Function: Website of the journal issue
    Download Restriction: no

    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
    2. Shaun French & Andrew Leyshon & Nigel Thrift, 2009. "A very geographical crisis: the making and breaking of the 2007--2008 financial crisis," Cambridge Journal of Regions, Economy and Society, Cambridge Political Economy Society, vol. 2(2), pages 287-302.
    3. Frankenberg, E. & Thomas, D. & Beegle, K., 1999. "The Real Costs of Indonesia's Economic Crisis: Preliminary Findings from the Indonesia Family Life Surveys," Papers 99-04, RAND - Labor and Population Program.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Input prices; mandatory unbundling; make-or-buy decisions; deregulation; product differentiation;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L49 - Industrial Organization - - Antitrust Issues and Policies - - - Other
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ege:journl:v:12:y:2012:i::p:1-8. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Baris Gök). General contact details of provider: http://edirc.repec.org/data/iiegetr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.