Are input prices irrelevant for make-or-buy decisions? |
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Authors: | Philip G Gayle Dennis L Weisman |
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Institution: | (1) Department of Economics, Kansas State University, Manhattan, KS 66506–4001, USA |
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Abstract: | The 1996 Telecommunications Act requires incumbent providers to lease network inputs to rivals at cost-based prices in order
to jump-start competition. Sappington (Sappington, D. (2005). American Economic Review, 95(5), 1631–1638) uses the Hotelling model to show that input prices are irrelevant for an entrant’s decision to make or buy
an input required for downstream production. We show that this result depends upon the particular model of competition employed.
Specifically, input prices are not necessarily irrelevant in the Bertrand vertical differentiation model and are not irrelevant
in the Cournot model. It follows that departures from cost-based input prices may distort entrants’ make-or-buy decisions
in settings of practical interest.
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Keywords: | Access charges Build-or-buy decisions |
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