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Outsourcing versus technology transfer: Hotelling meets Stackelberg

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  • Pierce, Andrea
  • Sen, Debapriya

Abstract

This paper considers a Hotelling duopoly with two firms A and B in the final good market. Both A and $B$ can produce the required intermediate good, firm B having a lower cost due to a superior technology. We compare two contracts: outsourcing (A orders the intermediate good from B) and technology transfer (B transfers its technology to A). First we show that an outsourcing order acts as a credible commitment on part of A to maintain a certain market share in the final good market. This generates an indirect Stackelberg leadership effect, which is absent in a technology transfer contract. We show that compared to the situation of no contracts, there are always Pareto improving outsourcing contracts but no Pareto improving technology transfer contracts. Finally, it is shown that whenever both firms prefer one of the two contracts, all consumers prefer the other contract.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15673.

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Date of creation: 11 Jun 2009
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Handle: RePEc:pra:mprapa:15673

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Keywords: Outsourcing; Technology transfer; Hotelling duopoly; Stackelberg effect; Pareto improving contracts;

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  2. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2004. "Trade liberalization and strategic outsourcing," Journal of International Economics, Elsevier, vol. 63(2), pages 419-436, July.
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  17. Arya, Anil & Mittendorf, Brian & Sappington, David E.M., 2008. "Outsourcing, vertical integration, and price vs. quantity competition," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(1), pages 1-16, January.
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  20. Toshihiro Matsumura & Noriaki Matsushima & Giorgos Stamatopoulos, 2010. "Location equilibrium with asymmetric firms: the role of licensing," Journal of Economics, Springer, vol. 99(3), pages 267-276, April.
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Cited by:
  1. Yutian Chen & Pradeep Dubey & Debapriya Sen, 2006. "Outsourcing Induced by Strategic Competition," Cowles Foundation Discussion Papers 1589, Cowles Foundation for Research in Economics, Yale University.

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