On the Irrelevance of Input Prices for Make-or-Buy Decisions

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...

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Bibliographic Details
Published in:The American economic review 2005-12, Vol.95 (5), p.1631-1638
Main Author: Sappington, David E. M
Format: Article
Language:English
Subjects:
Capital costs
Cost efficiency
Decision making
Economic analysis
Economic models
Economic theory
Efficiency decisions
Incumbents
Input prices
Price efficiency
Prices
Production costs
Production management
Production systems
Retail prices
Shorter Papers
Streams
Studies
Telecommunications industry
Unit costs
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Summary: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.
ISSN:0002-8282
1944-7981
DOI:10.1257/000282805775014344