Strategic bi-sourcing

We provide a theoretical justification for bi-sourcing, which refers to thesituation where a final goods producer buys an input from an outside supplier and alsoproduces it in-house. Bi-sourcing occurs if the marginal cost of producing the input inhouseis higher than the marginal cost of outside input supplier. In-house inputproduction helps to reduce the input price charged by the outside supplier, and may makebi-sourcing as a profitable strategy. We show that bi-sourcing can be a profitable strategyunder both monopoly and product market competition. The incentive for bi-sourcingdepends on the product market and outside input market competition...