When Do Input Prices Matter For Make-Or-Buy Decisions?

David Mandy ()

No 701, Working Papers from Department of Economics, University of Missouri

Abstract: We investigate input pricing regimes that induce efficient make-or-buy decisions by entrants when there is constant returns in the production of the input(s) and simultaneous noncooperative price competition in downstream retail markets. A necessary and sufficient condition for efficient make-or-buy decisions is derived. This condition shows that input prices are relevant for make-or-buy decisions except under restrictive and often unverifiable assumptions on the demand structure, and that the least informationally-demanding way to ensure efficient make-or-buy decisions is to price inputs at marginal cost. The extent to which input prices can depart from marginal cost while still inducing efficient make-or-buy decisions depends on the relative efficiency of the incumbent and the demand displacement ratio, with significant departures possible even for modest efficiency differences when products are nearly homogeneous.

Keywords: Input Pricing Policy; Productive Efficiency. (search for similar items in EconPapers)
JEL-codes: L5 L9 (search for similar items in EconPapers)
Pages: 14 pgs.
Date: 2007-01-16
New Economics Papers: this item is included in nep-com
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Published in Journal of Regulatory Economics 2009

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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:0701

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