Supplier Encroachment with Mutual Outsourcing

Chrysovalantou Milliou and Konstantinos Serfes

No 10519, CESifo Working Paper Series from CESifo

Abstract: We examine the incentives and implications of supplier encroachment, when final good produc-tion requires the use of multiple complementary inputs and the entry of a supplier into the final good market gives rise to mutual outsourcing of inputs between the encroaching supplier and the incumbent. We show that, post encroachment, mutual outsourcing between the competing final good producers is indeed the equilibrium. We also show, contrary to existing results, that encroachment can raise the input price paid by the incumbent and reduce consumer surplus. Nevertheless, the incumbent can benefit from encroachment due to the generation of a new profits source: input sales to the encroaching supplier. It can benefit even without enjoying a cost or a first mover advantage. This would have been impossible in an environment with a single input and without mutual outsourcing. Our analysis yields novel managerial, empirical and policy implications.

Keywords: supplier encroachment; complementary inputs; mutual outsourcing; outsourcing; input pricing; market entry (search for similar items in EconPapers)
JEL-codes: D43 L11 L21 L22 L23 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-com and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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