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<p>We study the strategic interaction between a downstream firm’s make-or-buy decision and an upstream firm’s investment decision. Our findings show that a downstream firm may have an incentive to make an essential input internally rather than to buy the input from a more cost-efficient supplier. By doing so, the downstream firm can deter the supplier from undertaking cost-reducing investments, which thereby increases the input price for its rivals who depend on the same supplier. This strategic element to the make-or-buy decision can result in underinvestment and an inefficient production pattern within the industry. Moreover, this adverse effect is more pronounced when the investment can generate greater efficiency gains.</p>

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A New Strategic Element to the Make-or-Buy Decision

  • 期刊论文

  • 出版模式：

    开放获取

  • 发表日期：

    2026年7月24日

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  • Chifeng Dai

摘要

We study the strategic interaction between a downstream firm’s make-or-buy decision and an upstream firm’s investment decision. Our findings show that a downstream firm may have an incentive to make an essential input internally rather than to buy the input from a more cost-efficient supplier. By doing so, the downstream firm can deter the supplier from undertaking cost-reducing investments, which thereby increases the input price for its rivals who depend on the same supplier. This strategic element to the make-or-buy decision can result in underinvestment and an inefficient production pattern within the industry. Moreover, this adverse effect is more pronounced when the investment can generate greater efficiency gains.