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Strategic Outsourcing Revisited

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  • Stefan Buehler

    ()
    (Socioeconomic Institute, University of Zurich)

  • Justus Haucap

    ()
    (University of the Federal Armed Forces, Hamburg)

Abstract

This paper analyzes a sequential game where firms decide about outsourcing the production of a non-specific input good to an imperfectly competitive input market. We apply the taxonomy of business strategies introduced by Fudenberg and Tirole (1984) to characterize the different equilibria. We find that outsourcing generally softens competition in the final product market. If firms anticipate the impact of their outsourcing decisions on input prices, there may be equilibria where firms outsource so as to collude or to raise rivals’ costs. We illustrate our analysis using a linear Cournot model.

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File URL: http://www.soi.uzh.ch/research/wp/2003/wp0305.pdf
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Bibliographic Info

Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0305.

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Length: 18 pages
Date of creation: Jul 2003
Date of revision:
Publication status: Published in Journal of Economic Behavior & Organization 6(3), 2006, pages 325-338
Handle: RePEc:soz:wpaper:0305

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Keywords: strategic outsourcing; Cournot model;

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References

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  1. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2001. "Trade Liberalization and Strategic Outsourcing," Discussion Papers 2001-04, Graduate School of Economics, Hitotsubashi University.
  2. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Buehler, Stefan & Schmutzler, Armin & Benz, Men-Andri, 2004. "Infrastructure quality in deregulated industries: is there an underinvestment problem?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(2), pages 253-267, February.
  4. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Rainer Winkelmann, 2002. "Subjektive Daten in der empirischen Wirtschaftsforschung: Probleme und Perspektiven," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0207, Socioeconomic Institute - University of Zurich, revised Jul 2002.
  6. Gorzig, Bernd & Andreas Stephan, 2003. "Outsourcing and Firm-level Performance," Royal Economic Society Annual Conference 2003, Royal Economic Society 90, Royal Economic Society.
  7. Andreas Polk, 2002. "Multilateral Agreement On Investments (MAI) - A Critical Assessment From an Industrial Economics Point of View," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0201, Socioeconomic Institute - University of Zurich, revised Feb 2002.
  8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  9. Daniel Halbheer & Sarah Niggli & Armin Schmutzler, 2006. "What Does it Take to Sell Environmental Policy? An Empirical Analysis of Referendum Data," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 33(4), pages 441-462, 04.
  10. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 85-120, February.
  11. Zava Aydemir & Stefan Buehler, 2002. "Estimating Vertical Foreclosure in U.S. Gasoline Supply," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0212, Socioeconomic Institute - University of Zurich.
  12. Masahiro Abiru & Babu Nahata & Subhashis Raychaudhuri & Michael Waterson, 2003. "Equilibrium structures in vertical oligopoly," General Economics and Teaching, EconWPA 0306010, EconWPA.
  13. Salinger, Michael A, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(2), pages 345-56, May.
  14. Shy, Oz & Stenbacka, Rune, 2003. "Strategic outsourcing," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 50(2), pages 203-224, February.
  15. Yongmin Chen, 2005. "Vertical Disintegration," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 14(1), pages 209-229, 03.
  16. Yves Schneider & Peter Zweifel, 2004. "How Much Internalization of Nuclear Risk Through Liability Insurance?," Journal of Risk and Uncertainty, Springer, Springer, vol. 29(3), pages 219-240, December.
  17. Thomas J. Holmes, 1995. "Localization of industry and vertical disintegration," Staff Report, Federal Reserve Bank of Minneapolis 190, Federal Reserve Bank of Minneapolis.
  18. Salop, Steven C & Scheffman, David T, 1987. "Cost-Raising Strategies," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 36(1), pages 19-34, September.
  19. Thomas Borek & Stefan Buehler & Armin Schmutzler, 2002. "Weddings with Uncertain Prospects – Mergers under Asymmetric Information," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0213, Socioeconomic Institute - University of Zurich, revised Feb 2004.
  20. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  21. Fixler, Dennis J. & Siegel, Donald, 1999. "Outsourcing and productivity growth in services," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 10(2), pages 177-194, June.
  22. Andreas Polk & Armin Schmutzler, 2003. "Lobbying against Environmental Regulation vs. Lobbying for Loopholes," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0301, Socioeconomic Institute - University of Zurich.
  23. Gal-Or, Esther, 1999. "Vertical integration or separation of the sales function as implied by competitive forces," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 17(5), pages 641-662, July.
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Citations

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Cited by:
  1. Yutian Chen & Pradeep Dubey & Debapriya Sen, 2006. "Outsourcing Induced by Strategic Competition," Levine's Bibliography 321307000000000674, UCLA Department of Economics.
  2. Simon Loertscher & Yves Schneider, 2005. "Switching Costs, Firm Size, and Market Structure," SOI - Working Papers, Socioeconomic Institute - University of Zurich 0508, Socioeconomic Institute - University of Zurich.
  3. Tarun Kabiraj & Uday Bhanu Sinha, 2014. "Strategic Outsourcing with Technology Transfer under Cournot Competition," Economics Bulletin, AccessEcon, vol. 34(2), pages 1133-1140.
  4. Frode Meland & Odd Rune Straume, 2006. "Outsourcing in Contests," CESifo Working Paper Series 1658, CESifo Group Munich.
  5. João Teixeira, 2014. "Outsourcing with debt financing," Portuguese Economic Journal, Springer, Springer, vol. 13(1), pages 1-24, April.
  6. Angela Triguero, & Carmen Díaz Mora, . "Why do some firms contract out production?," Studies on the Spanish Economy 232, FEDEA.
  7. Chen, Yutian & Sen, Debapriya, 2010. "Strategic Outsourcing under Economies of Scale," MPRA Paper 20763, University Library of Munich, Germany.
  8. Buehler, Stefan & Burghardt, Dirk, 2013. "Globalization and Vertical Structure: An Empirical Investigation," Economics Working Paper Series 1310, University of St. Gallen, School of Economics and Political Science.
  9. Tarun Kabiraj & Uday Bhanu Sinha, 2011. "Strategic Outsourcing with Technology Transfer," Working papers 203, Centre for Development Economics, Delhi School of Economics.
  10. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.
  11. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, Springer, vol. 102(2), pages 137-156, March.

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