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The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier

Author

Listed:
  • Anil Arya

    () (Fisher College of Business, Ohio State University, Columbus, Ohio 43210)

  • Brian Mittendorf

    () (School of Management, Yale University, New Haven, Connecticut 06520)

  • David E. M. Sappington

    () (Department of Economics, University of Florida, Gainesville, Florida 32611)

Abstract

Firms routinely decide whether to make essential inputs themselves or buy the inputs from independent suppliers. Conventional wisdom suggests that a firm will not buy an input for a price above its in-house cost of production. We show that this is not necessarily the case when a monopolistic input supplier also serves the firm's retail rival. In this case, the decision to buy the input (and thus become one of the supplier's customers) can limit the incentive the supplier would otherwise have to provide the input on particularly favorable terms to the retail rival. Thus, a retail competitor may pay a premium to outsource production to a common supplier in order to raise its rivals' costs.

Suggested Citation

  • Anil Arya & Brian Mittendorf & David E. M. Sappington, 2008. "The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier," Management Science, INFORMS, vol. 54(10), pages 1747-1758, October.
  • Handle: RePEc:inm:ormnsc:v:54:y:2008:i:10:p:1747-1758
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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0896
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chen, Yutian & Dubey, Pradeep & Sen, Debapriya, 2011. "Outsourcing induced by strategic competition," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 484-492, July.
    2. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.
    3. Kabiraj, Tarun & Sinha, Uday Bhanu, 2016. "Strategic outsourcing with technology transfer under price competition," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 281-290.
    4. Øystein Foros & Hans Jarle Kind, 2017. "Upstream Partnerships among Competitors when Size Matters," CESifo Working Paper Series 6512, CESifo Group Munich.
    5. Tarun Kabiraj & Uday Bhanu Sinha, 2017. "Outsourcing Under Incomplete Information," Working Papers id:12217, eSocialSciences.
    6. Tarun Kabiraj & Uday Bhanu Sinha, 2014. "Strategic Outsourcing with Technology Transfer under Cournot Competition," Economics Bulletin, AccessEcon, vol. 34(2), pages 1133-1140.
    7. Kenneth Fjell & Øystein Foros & Hans Jarle Kind, 2015. "On the Choice of Royalty Rule to Cover Fixed Costs in Input Joint Ventures," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 22(3), pages 393-406, November.
    8. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.
    9. Yen-Ju Lin & Yan-Shu Lin & Kuang-I Tu, 2016. "Strategic input outsourcing and equilibrium location choice," The Annals of Regional Science, Springer;Western Regional Science Association, pages 83-99.
    10. repec:eee:reveco:v:53:y:2018:i:c:p:16-24 is not listed on IDEAS
    11. You, Jing & Imai, Katsushi S. & Gaiha, Raghav, 2016. "Declining Nutrient Intake in a Growing China: Does Household Heterogeneity Matter?," World Development, Elsevier, vol. 77(C), pages 171-191.
    12. Verena Nowak & Christian Schwarz & Jens Suedekum, 2012. "On the Organizational Structure of Multinational Firms - Which Sourcing Mode for which Input?," CESifo Working Paper Series 3823, CESifo Group Munich.
    13. Noriaki Matsushima & Laixun Zhao, 2015. "Strategic dual sourcing as a driver for free revealing of innovation," ISER Discussion Paper 0936, Institute of Social and Economic Research, Osaka University.
    14. Uday Bhanu Sinha, 2016. "Economies of Scale and (Non)Existence of Strategic Outsourcing in Cournot Duopoly," Economics Bulletin, AccessEcon, vol. 36(3), pages 1260-1266.
    15. Shy, Oz & Stenbacka, Rune, 2012. "Efficient organization of production: Nested versus horizontal outsourcing," Economics Letters, Elsevier, vol. 116(3), pages 593-596.
    16. Luciano Fanti & Marcella Scrimitore, 2017. "Hiring a manager or not? When asymmetric equilibria arise under outsourcing to a rival," Discussion Papers 2017/220, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    17. Qi Feng & Lauren Xiaoyuan Lu, 2012. "The Strategic Perils of Low Cost Outsourcing," Management Science, INFORMS, pages 1196-1210.
    18. Yutian Chen & Debapriya Sen, 2015. "Strategic Outsourcing Under Economies Of Scale," Bulletin of Economic Research, Wiley Blackwell, vol. 67(2), pages 134-145, April.
    19. Li, Li & Zhang, Rachel Q., 2015. "Cooperation through capacity sharing between competing forwarders," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 75(C), pages 115-131.
    20. Matsushima, Noriaki & Mizuno, Tomomichi, 2013. "Vertical separation as a defense against strong suppliers," European Journal of Operational Research, Elsevier, vol. 228(1), pages 208-216.
    21. Kopel, Michael & Löffler, Clemens & Pfeiffer, Thomas, 2016. "Sourcing strategies of a multi-input-multi-product firm," Journal of Economic Behavior & Organization, Elsevier, vol. 127(C), pages 30-45.

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