Managerial delegation under capacity commitment: a tale of two sources

The paper discusses the role of delegation to managers in a duopoly in which the optimal decisions upon in-house production and outsourcing may lead make and buy to coexist, namely bi-sourcing to arise at equilibrium. In the benchmark framework of quantity com- petition, outsourcing to an inefficient external manufacturing is shown to be strategically used under bi-sourcing with the aim to exploit market advantages induced by delegation. Strategic reasons for adopting either outsourcing or in-house production, besides leading firm’s profits to increase in the cost of internal or external production, let delegation not be the optimal (unique) endogenous choice, which contrasts with previous studies. It may also cause, under sufficiently high product differentiation, a reversal of the advantage of the delegating (first-mover) firm over the non-delegating (second-mover) rival.