Strategic bi-sourcing

Hamid Beladi and Arijit Mukherjee

Discussion Papers from University of Nottingham, School of Economics

Abstract: We provide a theoretical justification for bi-sourcing, which refers to the situation where a final goods producer buys an input from an outside supplier and also produces it in-house. Bi-sourcing occurs if the marginal cost of producing the input in-house is higher than the marginal cost of outside input supplier. In-house input production helps to reduce the input price charged by the outside supplier, and may make bi-sourcing as a profitable strategy. We show that bi-sourcing can be a profitable strategy under both monopoly and product market competition. The incentive for bi-sourcing depends on the product market and outside input market competition. Our result suggests that certain amount of input production with a relatively high-cost technology can make the consumers better off compared to the situation where the entire inputs are produced with a low-cost technology.

Keywords: Bi-sourcing; Competition; In-house input production (search for similar items in EconPapers)
Date: 2008-06
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Citations: View citations in EconPapers (2)

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