DP17729 Dual Sourcing and Resilient Supply Chains: The Case of Essential Ressources
We characterize strategic technology investments in essential resources. With a monopoly supplier dual sourcing is a strategy to reduce switching costs in the long-run. It serves as an insurance mechanism against future opportunism by providing access to competitive global markets. Investments in dual sourcing are required to limit abuse of market power by the active source provider, even though the option of dual sourcing may not be exercised in equilibrium. Our analysis has implications for the European natural gas market. LNG-terminals may serve a strategic purpose of limiting ex-post opportunism even when delivering gas by pipeline is more efficient.