To make or to buy from a common supplier? Strategic considerations and welfare consequences

Wei‐Jen Wen, Wen‐Chieh Lee and Chung‐Yen Lo

International Journal of Economic Theory, 2023, vol. 19, issue 1, 39-61

Abstract: Consider two downstream firms that each can either produce an input in‐house or purchase it from an upstream supplier. We show that depending on the difference between the supplier's and the downstream firms' in‐house production costs, outsourcing by both firms could help them achieve a Pareto improvement or leave them trapped in a prisoner's dilemma. Furthermore, we find that two downstream firms may play a chicken game in which each makes a sourcing decision different from its rival if the input supplier is not as efficient as in the previous cases. The welfare implications of various sourcing outcomes are explored.

Date: 2023
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