Enemy or Frenemy? Horizontal-Sourcing Decisions Under Cross-Channel Spillover Effects

Previous studies on horizontal sourcing between competing duopolists typically focus on the production factors in the traditional operations environment. However, as the operations environment shifts to online and offline sales, some new factors emerge and play a complex role in horizontal-sourcing decisions. This study explores one of the key factors of this sales context, the spillover effect of online channels on offline channels (including cannibalized and stimulative types) on the sourcing decisions between the duopolists. We establish a model in which an entrant manufacturer can obtain a component sourced from the incumbent manufacturer who has developed the component or developed it in-house, and both firms sell products through online and offline channels. We find that in the online and offline sales environment, high cannibalized spillovers consistently decrease the willingness of firms to engage in horizontal sourcing, whereas high stimulative spillovers may increase or decrease such willingness. Furthermore, we highlight the interaction between horizontal sourcing and the role of cross-channel spillover effects, finding that horizontal sourcing can essentially change the impact of spillovers on the incumbent manufacturer. Specifically, the incumbent manufacturer suffers from a large spillover in the absence of horizontal sourcing but benefits from such spillover in the presence of horizontal sourcing. Our main findings can be extended to several cases (e.g., endogenous sourcing fee, component sourcing providing a quality advantage, an alternative quality relationship, and endogenous offline channels).