Conventional wisdom suggests that downstream firms will not buy an input at a price exceeding the in-house cost of production. However, we show that competing downstream firms will pay a premium to outsource the input to a common supplier if the common supplier is efficient enough in producing the input. The decision of outsourcing is a double-edged sword for both downstream firms as it not only raises the cost of its rival but also the cost of the firm itself. Nevertheless, it pays for each downstream firm to outsource if the cost increase is more than offset by the gains from raising rival’s costs. Furthermore, we also show that there is a case in which each of the downstream firms makes a sourcing decision opposite to its rival if the input supplier is not as efficient as the previous case. Hence, the level of efficiency of the upstream supplier is the key to the decision-making of the downstream firms.

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