Sourcing Co-Created Products: Should your Suppliers Collaborate?

Oksana Loginova () and Niladri Syam ()
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Niladri Syam: Department of Marketing, Trulaske College of Business, University of Missouri

No 1811, Working Papers from Department of Economics, University of Missouri

Abstract: We investigate the phenomenon of sourcing co-created products. Specifically, we study how a multi-product downstream firm should source from the upstream market, that is single-source versus multi-source, in a situation where the products are co-created with the suppliers. We conceptualize co-creation as investments made at different hierarchical levels aimed at reducing the production costs incurred by the supplies. We also incorporate into our model the downstream firm's decision to establish a collaborative, knowledge-sharing environment for its suppliers. Outright purchase from the upstream market serves as a benchmark. We find that the downstream firm may be worse off when the upstream suppliers collaborate, unless the cross-effect of its and its suppliers' investments is very large. For a commonly used additively separable cost function, we find that the downstream firm's optimal strategy is multi-source co-creation without collaboration. An important economic force that our analysis has uncovered is that single-sourcing of co-created products destroys the downstream firm's incentives to invest. Multi-sourcing softens the holdup problem, leading to a positive level of investment by the downstream firm. Finally, we find that the incentives of the downstream firm to multi-source are stronger for co-created products than for non-co-created products.

Keywords: co-creation; product sourcing; collaboration; holdup (search for similar items in EconPapers)
JEL-codes: C72 D4 L1 M31 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2018
New Economics Papers: this item is included in nep-com
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Working Paper: Sourcing Co-Created Products: Should your Suppliers Collaborate? (2018)
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