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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Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number
11-2007.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Antràs, Pol & Helpman, Elhanan, 2004.
"Global Sourcing,"
CEPR Discussion Papers
4170, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted)
Other versions:
Pol Antràs & Elhanan Helpman, 2003.
"Global Sourcing,"
NBER Working Papers
10082, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Grossman, G.M. & Helpman, E., 2002.
"Outsourcing in a Global Economy,"
Papers
218, Princeton, Woodrow Wilson School - Public and International Affairs.
Gene M. Grossman & Elhanan Helpman, 2002.
"Outsourcing in a Global Economy,"
Working Papers
149, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
[Downloadable!]