Sourcing Co-Created Products: Should Your Suppliers Collaborate on Cost Reductions?
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We study how a multi-product downstream firm should source from the upstream market—single-source versus multi-source—in a situation where the products are co-created with the suppliers. We conceptualize co-creation as investments that are made at the different hierarchical levels and that are aimed at reducing the production costs incurred by the supplies. In the case when the downstream firm sources its products from multiple suppliers, it can foster cost-reduction collaboration among the suppliers. We find that the downstream firm may be worse off when the upstream suppliers collaborate. For a commonly used additively separable cost function, we show that the downstream firm’s optimal strategy is multi-source co-creation without collaboration. Multi-sourcing softens the holdup problem and leads to a positive level of investment by the downstream firm.
KeywordsCo-creation Collaboration Holdup Product sourcing
JEL ClassificationC72 D4 L1 M31
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