American Economic Review: Vol. 95 No. 5 (December 2005)
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On the Irrelevance of Input Prices for Make-or-Buy Decisions
Sappington, DavidE. 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions." American Economic Review, 95(5): 1631-1638.
This paper demonstrates that input prices need not reflect the costs of an efficient incumbent supplier in order to induce entrants to implement efficient make-or-buy decisions. Because of strategic downstream considerations, entrants may always undertake efficient make-or-buy decisions, regardless of the prices at which they are authorized to buy key inputs from incumbent suppliers.
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Sappington, David E. M