Sourcing Strategies of a Multi-Input-Multi-Product Firm

Abstract

Firms commonly manufacture multiple products using multiple complementary inputs. The multi-input-multi-product environment generates interactions among products yielding the following results for the firm's sourcing strategies: (i) A multi-input-multi-product firm might optimally deviate from an isolated least-cost comparison, i.e. might produce in-house even if marginal in-house production cost exceeds the per-unit input price (and vice versa). Such a deviation can be optimal even if the input supplier can engage in price discrimination and can condition its input prices on the individual products that the firm manufactures. (ii) An outsourcing wave can arise in that concurrently outsourcing all inputs can be profitable for the firm even though outsourcing each input individually is unprofitable. (iii) More competition on the supplier market can decrease the multi-input-multi-product-firm's profit.

Keywords: make-or-buy; multi-product firm; outsourcing

JEL Classification: D21, L11, L22