We take a game theory approach to study the make-or-buy decisions of firms in a mixed duopoly. We assume that a managerial firm and a profit-oriented firm compete in a duopoly market for a final good, and they can choose whether making an intermediate input or buying it from a monopolistic upstream firm. We find that different equilibria may arise, depending on parameter constellations.
In particular, if the technology used for the production of the intermediate input is too costly, then the internal organization of firms at equilibrium is mixed, creating a conflict with social preferences that would always privilege vertical integration to outsourcing. [JEL Classification: C72, L13, L22]