Working Paper: CEPR ID: DP17729
Authors: Thomas Gehrig; Rune Stenbacka
Abstract: We characterize strategic technology investments in essential resources. With a monopoly supplier dual sourcing is a strategy to reduce switching costs in the long-run. It serves as an insurance mechanism against future opportunism by providing access to competitive global markets. Investments in dual sourcing are required to limit abuse of market power by the active source provider, even though the option of dual sourcing may not be exercised in equilibrium. Our analysis has implications for the European natural gas market. LNG-terminals may serve a strategic purpose of limiting ex-post opportunism even when delivering gas by pipeline is more efficient.
Keywords: dual sourcing; resilience; switching costs; predatory investments; supply security; geopolitics
JEL Codes: D43; H54; L13; L41; L95
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dual sourcing (L24) | reduction of switching costs (L15) |
| dual sourcing (L24) | mitigation of strategic risks associated with supplier monopolies (L12) |
| existence of dual sourcing option (M11) | price discipline on suppliers (L11) |
| dual sourcing (L24) | securing delivery of essential resources at market prices (Q02) |
| investment in dual sourcing technologies (L24) | limitation of supplier's ability to extract excessive rents (D43) |
| existence of dual sourcing options (M11) | competitive pressure on suppliers (L11) |
| dual sourcing investments (G15) | protection against strategic holdup risks (L14) |
| dual sourcing investments (G15) | reduction of supplier opportunism (L14) |