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Overbuying, Demand Withholding, and Single Sourcing Under Decreasing Returns

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Journal of Industrial Economics

Published online on

Abstract

["The Journal of Industrial Economics, EarlyView. ", "\nABSTRACT\nConsider suppliers whose comparative advantages, which are unknown to a buyer, depend on the quantity procured. The distortions of the buyer purchase policy differs depending on the market characteristics. In a large market, either it overbuys to suppliers with steep marginal costs, who are better at producing a small volume; or it withholds the demand it addresses to suppliers with flatter marginal costs, who are better at producing a large volume. The latter policy is implemented through a concave tariff offered to the less capacity constrained suppliers. In a small market, demand withholding prevails and some suppliers can be excluded.\n"]