Make-or-Buy Decisions in Eco-Friendly Markets: Supplier Coopetition and Sustainability Reputation Spillovers

Abstract

Large diversified firms seeking to enter eco-friendly markets must decide whether to source essential green components from specialized suppliers or develop comparable components in-house. External sourcing facilitates rapid market entry and avoids costly development, but it creates dependence on a specialized supplier that also competes downstream. Internal development eliminates this dependence and gives the diversified firm greater control over component production but it requires substantial investment and may place the firm at a production cost disadvantage relative to the specialized supplier. Moreover, sustainability reputation spillovers further complicate this make-or-buy dilemma, as participation in the eco-friendly market can generate positive reputational effects across the diversified firm’s broader product portfolio. To examine how these trade-offs and reputation spillovers jointly affect sourcing decisions and supply chain structures, we develop a game-theoretic model in which a specialized supplier serves as both a component provider and a downstream competitor. We identify three equilibrium supply chain structures: external sourcing with upstream–downstream coopetition, internal development with Cournot competition, and internal development leading to the supplier’s exit from the downstream market. A critical insight is the supplier’s dilemma: while moderate reputation benefits create mutually profitable coopetition, sufficiently large benefits trigger the diversified firm’s internalization, eliminating the supply relationship and potentially resulting in its exit from the downstream market. Further analysis shows that a higher supplier marginal production cost affects both the diversified firm’s sourcing decision and the conditions under which supplier market exit can occur, whereas a higher fixed development cost shifts the decision boundary toward external sourcing. Our findings suggest that policies amplifying reputation benefits may induce large firms to replace external sourcing from lower-cost specialized suppliers with higher-cost internal development, displacing specialized green producers and duplicating existing technology investments.