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Outsourcing and Competition Policy

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Author Info

  • Cosimo Beverelli

    ()

  • Kornel Mahlstein

    ()

Abstract

We analyze optimal competition policy by a Competition Agency (CA) in a model with two countries, North and South, where a final good is produced by Northern oligopolistic firms using an input that can either be produced within the firm (vertical integration) or outsourced to Southern oligopolistic producers with lower labor costs (outsourcing). In the case where the final good is only consumed in the North and there is free entry in the South, we find that optimal competition policy in the North is the adoption of a tougher stance. However, with a CA in the South, the Southern CA would optimally appropriate outsourcing rents through restrictions on the degree of competition among domestic firms. In this case the optimal response of the Northern CA would be inaction. In the case where the final good is consumed in both countries, we find that optimal competition policy is marginally affected by the share of Southern consumption, leaving relatively important incentives to engage in rent-shifting. However, for a high enough share of Southern consumption, the interaction between the Northern and Southern CA is shown to be of the Prisoner's Dilemma type, whereby the Nash equilibrium is Pareto-suboptimal and mutual cooperation on competition policy is globally desirable.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s10842-010-0068-z
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Bibliographic Info

Article provided by Springer in its journal Journal of Industry, Competition and Trade.

Volume (Year): 11 (2011)
Issue (Month): 2 (June)
Pages: 131-147

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Handle: RePEc:kap:jincot:v:11:y:2011:i:2:p:131-147

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Web page: http://springerlink.metapress.com/link.asp?id=105724

Related research

Keywords: competition authority; rents; outsourcing; F15; F23; L13; L40;

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References

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  1. Jota Ishikawa & Barbara J. Spencer, 1996. "Rent-Shifting Export Subsidies with an Imported Intermediate Product," NBER Working Papers 5458, National Bureau of Economic Research, Inc.
  2. Oz Shy & Rune Stenbacka, 2005. "Partial outsourcing, monitoring cost, and market structure," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1173-1190, November.
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  20. repec:rus:hseeco:122439 is not listed on IDEAS
  21. Barros, Pedro P. & Cabral, Luis, 1994. "Merger policy in open economies," European Economic Review, Elsevier, vol. 38(5), pages 1041-1055, May.
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  24. J Peter Neary, 2002. "The Road Less Travelled - Oligopoly and Competition Policy in General Equilibrium," Working Papers 200222, School Of Economics, University College Dublin.
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Cited by:
  1. Cassey LEE & Yoshifumi FUKUNAGA, 2013. "Competition Policy Challenges of Single Market and Production Base," Working Papers DP-2013-17, Economic Research Institute for ASEAN and East Asia (ERIA).

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