Complementary Inputs, Mutual Outsourcing, and Supplier Encroachment
52 Pages Posted: 10 Sep 2020 Last revised: 28 Jul 2023
Date Written: September 5, 2020
Abstract
Final goods are typically produced using multiple complementary inputs. We examine the incentives and implications of supplier encroachment incorporating this and allowing for the possibility of mutual outsourcing between the encroached supplier and the incumbent. First, we demonstrate that mutual outsourcing arises in equilibrium. Then, we demonstrate that encroachment can raise the wholesale price faced by the incumbent. Nevertheless, the incumbent can benefit from encroachment as it generates input sales to the encroached supplier. These would not occur with a single input. We also demonstrate that non-linear wholesale pricing has a non-trivial role for mutual outsourcing and encroachment.
Keywords: supplier encroachment; complementary inputs; input pricing; market entry
JEL Classification: D43; L11; L21; L22; L23
Suggested Citation: Suggested Citation