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The make-or-buy choice in a mixed oligopoly: a theoretical investigation

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  • R. Cellini
  • L. Lambertini

Abstract

We take a game theory approach to study the make-or-buy decisions of firms in a mixed duopoly. We assume that a managerial firm and a profit-oriented firm compete in a duopoly market for a final good, and they can choose whether making an intermediate input or buying it from a monopolistic upstream firm. We find that different equilibria may arise, depending on parameter constellations. In particular, if the technology used for the production of the intermediate input is too costly, then the internal organization of firms at equilibrium is mixed, creating a conflict with social preferences that would always privilege vertical integration to outsourcing.

Suggested Citation

  • R. Cellini & L. Lambertini, 2007. "The make-or-buy choice in a mixed oligopoly: a theoretical investigation," Working Papers 618, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:618
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    References listed on IDEAS

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    1. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    2. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
    3. Gene M. Grossman & Elhanan Helpman, 2005. "Outsourcing in a Global Economy," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 135-159.
    4. Perry, Martin K., 1989. "Vertical integration: Determinants and effects," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 4, pages 183-255 Elsevier.
    5. Steven Tadelis, 2002. "Complexity, Flexibility, and the Make-or-Buy Decision," American Economic Review, American Economic Association, vol. 92(2), pages 433-437, May.
    6. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 552-580, June.
    7. repec:hrv:faseco:4784029 is not listed on IDEAS
    8. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
    9. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.
    10. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
    11. Patrizio Bianchi & Sandrine Labory & Daniele Paci, 2006. "Small and Medium-sized Enterprise Policies in Europe, Latin America and Asia," Chapters,in: International Handbook on Industrial Policy, chapter 19 Edward Elgar Publishing.
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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