Profit reducing international outsourcing
AbstractRecent empirical evidence shows a negative relationship between international outsourcing and profitability. This paper provides a theoretical explanation for this phenomenon. We show that, in an oligopolistic market, firms earn lower profits in the outsourcing equilibrium compared to the situation where neither firm does outsourcing, and this holds irrespective of the intensity of competition. We show that whether international outsourcing is likely to reduce profit under more intense competition (measured by the degree of product differentiation, number of firms and the type of product market competition, namely, Cournot and Bertrand competition) is ambiguous. We further show that international outsourcing may be socially 'excessive' for the sourced country and for the world.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.
Volume (Year): 17 (2008)
Issue (Month): 1 ()
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- María �ngeles Cadarso Vecina & Nuria G�mez Sanz & Luis Antonio L�pez Santiago & María �ngeles Tobarra G�mez, 2012. "Offshoring components and their effect on employment: firms deciding about how and where," Applied Economics, Taylor & Francis Journals, vol. 44(8), pages 1009-1020, March.
- Arijit Mukherjee & Yingyi Tsai, 2010.
"International Outsourcing And Welfare Reduction: An Entry-Deterrence Story,"
University of Manchester, vol. 78(6), pages 647-659, December.
- Arijit Mukherjee & Yingyi Tsai, . "International Outsourcing and Welfare Reduction: an Entry-deterrence Story," Discussion Papers 08/45, University of Nottingham, GEP.
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