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Outsourcing and Competition Policy

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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.

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Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 11-2007.

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Length: 25
Date of creation: Mar 2007
Date of revision: Mar 2007
Handle: RePEc:gii:giihei:heiwp11-2007

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Keywords: Competition policy; outsourcing; vertical integration;

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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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