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Outsourcing induced by strategic competition

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  • Chen, Yutian
  • Dubey, Pradeep
  • Sen, Debapriya

Abstract

We show that 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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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 4 (July)
Pages: 484-492

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Handle: RePEc:eee:indorg:v:29:y:2011:i:4:p:484-492

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Intermediate goods Outsourcing Cournot duopoly Stackelberg duopoly;

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References

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  1. Stefan Buehler & Justus Haucap, 2003. "Strategic Outsourcing Revisited," SOI - Working Papers 0305, Socioeconomic Institute - University of Zurich.
  2. Mailath George J., 1993. "Endogenous Sequencing of Firm Decisions," Journal of Economic Theory, Elsevier, vol. 59(1), pages 169-182, February.
  3. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 85-120, February.
  4. Chen, Yutian & Dubey, Pradeep & Sen, Debapriya, 2011. "Outsourcing induced by strategic competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 29(4), pages 484-492, July.
  5. Hamilton, J.H. & Slutsky, S.M., 1988. "Endogenous Timing In Duopoly Games: Stackelberg Or Cournot Equilibria," Papers, Florida - College of Business Administration 88-4, Florida - College of Business Administration.
  6. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  7. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2001. "Trade Liberalization and Strategic Outsourcing," Discussion Papers 2001-04, Graduate School of Economics, Hitotsubashi University.
  8. Arya, Anil & Mittendorf, Brian & Sappington, David E.M., 2008. "Outsourcing, vertical integration, and price vs. quantity competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(1), pages 1-16, January.
  9. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(357), pages 95-106, March.
  10. Anil Arya & Brian Mittendorf & David E. M. Sappington, 2008. "The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier," Management Science, INFORMS, INFORMS, vol. 54(10), pages 1747-1758, October.
  11. Pierce, Andrea & Sen, Debapriya, 2009. "Outsourcing versus technology transfer: Hotelling meets Stackelberg," MPRA Paper 15673, University Library of Munich, Germany.
  12. Pal, Debashis, 1996. "Endogenous Stackelberg Equilibria with Identical Firms," Games and Economic Behavior, Elsevier, vol. 12(1), pages 81-94, January.
  13. Damme, E.E.C. van & Hurkens, J.P.M., 1999. "Endogenous Stackelberg leadership," Open Access publications from Tilburg University urn:nbn:nl:ui:12-154410, Tilburg University.
  14. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.
  15. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
  16. Pio Baake & Jörg Oechssler & Christoph Schenk, 1999. "Explaining cross-supplies," Journal of Economics, Springer, vol. 70(1), pages 37-60, February.
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  18. Robson, Arthur J, 1990. "Duopoly with Endogenous Strategic Timing: Stackelberg Regained," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 263-74, May.
  19. D. Lee Heavner, 2004. "Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor," Journal of Industrial Economics, Wiley Blackwell, vol. 52(2), pages 179-199, 06.
  20. Shy, Oz & Stenbacka, Rune, 2003. "Strategic outsourcing," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 203-224, February.
  21. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, Elsevier, Elsevier.
  22. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  23. Vidal, Carlos J. & Goetschalckx, Marc, 1997. "Strategic production-distribution models: A critical review with emphasis on global supply chain models," European Journal of Operational Research, Elsevier, vol. 98(1), pages 1-18, April.
  24. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
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Citations

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Cited by:
  1. Chen, Yutian & Dubey, Pradeep & Sen, Debapriya, 2011. "Outsourcing induced by strategic competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 29(4), pages 484-492, July.
  2. Andrea Pierce & Debapriya Sen, 2014. "Outsourcing versus technology transfer: Hotelling meets Stackelberg," Journal of Economics, Springer, vol. 111(3), pages 263-287, April.
  3. Tarun Kabiraj & Uday Bhanu Sinha, 2014. "Strategic Outsourcing with Technology Transfer under Cournot Competition," Economics Bulletin, AccessEcon, vol. 34(2), pages 1133-1140.
  4. Tarun Kabiraj & Uday Bhanu Sinha, 2011. "Strategic Outsourcing with Technology Transfer," Working papers 203, Centre for Development Economics, Delhi School of Economics.
  5. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.
  6. Chen, Yutian & Sen, Debapriya, 2010. "Strategic Outsourcing under Economies of Scale," MPRA Paper 20763, University Library of Munich, Germany.
  7. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.

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