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Strategic outsourcing revisited

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  • Buehler, Stefan
  • Haucap, Justus

Abstract

This paper analyzes a sequential game where firms decide about outsourcing the production of a non-specific input good to an imperfectly competitive input market. We apply the taxonomy of business strategies introduced by Fudenberg and Tirole (1984) to characterize the different equilibria. We find that outsourcing generally softens competition in the final product market. If firms anticipate the impact of their outsourcing decisions on input prices, there may be equilibria where firms outsource so as to collude or to raise rivals’ costs. We illustrate our analysis using a linear Cournot model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 61 (2006)
Issue (Month): 3 (November)
Pages: 325-338

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Handle: RePEc:eee:jeborg:v:61:y:2006:i:3:p:325-338

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  1. Fixler, Dennis J. & Siegel, Donald, 1999. "Outsourcing and productivity growth in services," Structural Change and Economic Dynamics, Elsevier, vol. 10(2), pages 177-194, June.
  2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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Citations

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Cited by:
  1. Simon Loertscher & Yves Schneider, 2005. "Switching Costs, Firm Size, and Market Structure," Diskussionsschriften dp0515, Universitaet Bern, Departement Volkswirtschaft.
  2. Chen, Yutian & Sen, Debapriya, 2010. "Strategic Outsourcing under Economies of Scale," MPRA Paper 20763, University Library of Munich, Germany.
  3. Angela Triguero, & Carmen Díaz Mora, . "Why do some firms contract out production?," Studies on the Spanish Economy 232, FEDEA.
  4. Frode Meland & Odd Rune Straume, 2006. "Outsourcing in Contests," CESifo Working Paper Series 1658, CESifo Group Munich.
  5. Chen, Yutian & Dubey, Pradeep & Sen, Debapriya, 2009. "Outsourcing induced by strategic competition," MPRA Paper 14899, University Library of Munich, Germany.
  6. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.
  7. Buehler, Stefan & Burghardt, Dirk, 2013. "Globalization and Vertical Structure: An Empirical Investigation," Economics Working Paper Series 1310, University of St. Gallen, School of Economics and Political Science.
  8. Tarun Kabiraj & Uday Bhanu Sinha, 2011. "Strategic Outsourcing with Technology Transfer," Working papers 203, Centre for Development Economics, Delhi School of Economics.
  9. Tarun Kabiraj & Uday Bhanu Sinha, 2014. "Strategic Outsourcing with Technology Transfer under Cournot Competition," Economics Bulletin, AccessEcon, vol. 34(2), pages 1133-1140.
  10. João Teixeira, 2014. "Outsourcing with debt financing," Portuguese Economic Journal, Springer, vol. 13(1), pages 1-24, April.
  11. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.

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