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AN EFFICIENCY EXPLANATION FOR WHY FIRMS SECOND SOURCE
Author(s) -
DICK ANDREW R.
Publication year - 1992
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1992.tb01662.x
Subject(s) - economics , stock (firearms) , microeconomics , consumer demand , production (economics) , industrial organization , business , mechanical engineering , engineering
Firms facing research costs and demand uncertainty may engage in second‐sourcing, in which potential suppliers agree to pool production facilities. I show how sellers and buyers both can benefit from the practice. Second‐sourcing allows firms to meet a wider range of possible rates of demand and often to supply a given rate of demand at a lower total cost than under non‐cooperation. Buyers benefit through a reduced probability of stock‐outs and frequently a lower purchase price. Semiconductor industry data are found to be consistent with the paper's predictions.