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Sourcing Co-Created Products: Should Your Suppliers Collaborate on Cost Reductions?

Author

Listed:
  • Oksana Loginova

    (University of Missouri)

  • Niladri B. Syam

    (University of Missouri)

Abstract

We study how a multi-product downstream firm should source from the upstream market—single-source versus multi-source—in a situation where the products are co-created with the suppliers. We conceptualize co-creation as investments that are made at the different hierarchical levels and that are aimed at reducing the production costs incurred by the supplies. In the case when the downstream firm sources its products from multiple suppliers, it can foster cost-reduction collaboration among the suppliers. We find that the downstream firm may be worse off when the upstream suppliers collaborate. For a commonly used additively separable cost function, we show that the downstream firm’s optimal strategy is multi-source co-creation without collaboration. Multi-sourcing softens the holdup problem and leads to a positive level of investment by the downstream firm.

Suggested Citation

  • Oksana Loginova & Niladri B. Syam, 2020. "Sourcing Co-Created Products: Should Your Suppliers Collaborate on Cost Reductions?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(2), pages 329-355, March.
    • Handle: RePEc:kap:revind:v:56:y:2020:i:2:d:10.1007_s11151-019-09700-x
    DOI: 10.1007/s11151-019-09700-x
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    More about this item

    Keywords

    Co-creation; Collaboration; Holdup; Product sourcing;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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