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Overview: Intermediate goods can be sourced to firms on the outside (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that inside firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside.
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