Multi-sourcing as an entry deterrence strategy

Abstract

This paper studies the rationale for multiple sourcing. In a simple model of outsourcing that embodies technology transfer and the threat of competition from the supplier(s) due to imitation, we show that multiple sourcing helps to deter entry by the suppliers into the final goods market and enhances profitability of the outsourcing firm. Our explanation for multiple outsourcing differs from the standard arguments, which either reduce the double marginalization problem or eliminate supply bottlenecks.