On the Irrelevance of Input Prices for Make-or-Buy Decisions
AbstractThis 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.
CitationSappington, David, E M. 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions." American Economic Review, 95 (5): 1631-1638. DOI: 10.1257/000282805775014344
- L11 Production, Pricing, and Market Structure; Size Distribution of Firms
- L14 Transactional Relationships; Contracts and Reputation; Networks