Second Sourcing with Capacity Constrained Firms and Locked-In Buyers

Gherardo Girardi

International Journal of the Economics of Business, 2013, vol. 20, issue 1, 83-95

Abstract: I begin by surveying the motivations for second-sourcing agreements in the absence of licensing fees. I then focus on a particular motivation -- that of an incumbent wanting to relax a capacity constraint. I develop a general model with buyers locked into a product, and find necessary and sufficient conditions for an incumbent to benefit from the presence of rivals without any need to sign contracts with them, in contrast with Dick (1992) and with the literature on subcontracting. I show that multiple equilibria due to the self-fulfilling expectations of rivals are possible. With regards to policy, I find that, with homogeneous buyers, a monopolist incumbent will produce where price and marginal cost coincide. I illustrate the model's results with observations from the semiconductor industry .

Date: 2013
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DOI: 10.1080/13571516.2012.750046

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