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Strategic bi-sourcing

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  • Hamid Beladi
  • Arijit Mukherjee

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.

Suggested Citation

  • Hamid Beladi & Arijit Mukherjee, 2008. "Strategic bi-sourcing," Discussion Papers 08/06, University of Nottingham, School of Economics.
    • Handle: RePEc:not:notecp:08/06
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    File URL: https://www.nottingham.ac.uk/economics/documents/discussion-papers/08-06.pdf
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    References listed on IDEAS

    as
    1. Du, Julan & Lu, Yi & Tao, Zhigang, 2006. "Why do firms conduct bi-sourcing?," Economics Letters, Elsevier, vol. 92(2), pages 245-249, August.
    2. Arijit Mukherjee, 2008. "Unionised Labour Market and Strategic Production Decision of a Multinational," Economic Journal, Royal Economic Society, vol. 118(532), pages 1621-1639, October.
    3. Jay Pil Choi & Carl Davidson, 2004. "Strategic Second Sourcing by Multinationals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 579-600, May.
    4. Bruce Kogut & Nalin Kulatilaka, 1994. "Operating Flexibility, Global Manufacturing, and the Option Value of a Multinational Network," Management Science, INFORMS, vol. 40(1), pages 123-139, January.
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    Cited by:

    1. Sun, Churen & Tian, Guoqiang, 2011. "Firms' organizational modes with productivity heterogeneity, demand uncertainty and production capacity," MPRA Paper 35667, University Library of Munich, Germany.
    2. Chrysovalantou Milliou & Joel Sandonis, 2020. "Vertical foreign direct investment: Make, buy, and sell," Review of International Economics, Wiley Blackwell, vol. 28(3), pages 884-912, August.

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