Investments in supplier-specific economies of scope with two different services and different supplier characters: two specialists

Abstract

Firms have to choose their market positions. Suppliers can offer a wide range of services as generalists or they act as specialists by offering a small range of services. In this paper based on Chatain/Zemsky (Manag Sci 53:550–565, 2007) and Chatain (Strateg Manag J 32:76–102, 2011) we analyse how supplier-specific economies of scope generated by investments can compensate the loss occurring by a non-optimal organisational structure (resource configuration) of production. These considerations are modelled by a non-cooperative game with one buyer and two suppliers. We show how the buyer can gain from supplier-specific economies of scope. In this case, the buyer will never split the orders to both suppliers, i.e. he always should order one supplier, if the tasks have similar characteristics and the investment costs of a supplier result in higher specific economies of scope relevant to the choice of the buyer. The amount of the specific economies of scope determines to whom of the suppliers the buyer will place both orders. But, if the investment costs of the suppliers are very high and/or the gains of the buyer are rather low, the pure strategy combination “no investments” for the two suppliers will become the unique Nash equilibrium, whereby the buyer places the two orders each to the supplier who is the specialist for it.