Sourcing Strategy and Endogenous Stackelberg Leadership in a Cournot Duopoly

This paper examines a two-period Cournot sourcing game involving two final goods producers. In this game, the producers first decide how much of the intermediate input to produce themselves and then how much to purchase from the external market. If the cost difference between the final goods producers and external suppliers is not too large, an asymmetric equilibrium emerges whereby one producer both produces and purchases intermediate inputs, while the other only produces. This asymmetric equilibrium is a Stackelberg-type outcome, as the final goods producer that does not outsource inputs has a lead in choosing final goods output.