Cross-supplies describe the phenomenon that two or more firms in the same industry supply each other with their final products. A prominent example is the cooperation in the European flat-glass industry, which was recently criticized by the European Commission. In a simple model we attempt to explain what incentives firms may have to use cross-supplies (instead of producing the goods themselves) and what welfare effects cross-supplies have if they are used. Contrary to the ruling of the European Commission we find that cross-supplies improve welfare whenever they are employed. Furthermore, for a large range of parameters, they even benefit consumers.
Keywordscross-supplies subcontracting Stackelberg
JEL classificationL13 L22
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