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Partial outsourcing, monitoring cost, and market structure

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  • Oz Shy
  • Rune Stenbacka

Abstract

We investigate firms' outsourcing decisions when production requires a large number of inputs. The novelty of our approach is that it provides a testable framework to characterize the equilibrium fraction of outsourced inputs. We demonstrate that intensified competition in a Cournot market for the final good typically enlarges the set of outsourced components relative to those produced in-house. The proportions of outsourced inputs are found to be strategic substitutes independently of whether firms compete with respect to quantities or prices in the market for the final good.

Suggested Citation

  • Oz Shy & Rune Stenbacka, 2005. "Partial outsourcing, monitoring cost, and market structure," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1173-1190, November.
  • Handle: RePEc:cje:issued:v:38:y:2005:i:4:p:1173-1190
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    References listed on IDEAS

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    1. Ricardo J. Caballero & Mohamad L. Hammour, 1998. "The Macroeconomics of Specificity," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 724-767, August.
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    Cited by:

    1. repec:eee:jeborg:v:137:y:2017:i:c:p:90-104 is not listed on IDEAS
    2. Shy, Oz & Stenbacka, Rune, 2012. "Efficient organization of production: Nested versus horizontal outsourcing," Economics Letters, Elsevier, vol. 116(3), pages 593-596.
    3. Lommerud, Kjell Erik & Meland, Frode & Straume, Odd Rune, 2009. "Can deunionization lead to international outsourcing?," Journal of International Economics, Elsevier, vol. 77(1), pages 109-119, February.
    4. Courvoisier, François & Calmelet, Laurence, 2012. "Stratégies marketing pour PME sous-traitantes dans l’horlogerie
      [Marketing strategies for subcontractant SME in the watchmaking industry]
      ," MPRA Paper 43413, University Library of Munich, Germany, revised 01 May 2012.
    5. Di Corato, Luca & Moretto, Michele & Rossini, Gianpaolo, 2017. "Financing flexibility: The case of outsourcing," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 35-65.
    6. Xu, Su Xiu & Lu, Qiang & Huang, George Q. & Zhang, Ting, 2013. "Scope economies, market information, and make-or-buy decision under asymmetric information," International Journal of Production Economics, Elsevier, vol. 145(1), pages 339-348.
    7. Leahy, Dermot & Montagna, Catia, 2012. "Strategic investment and international outsourcing in unionised oligopoly," Labour Economics, Elsevier, vol. 19(2), pages 260-269.
    8. M. Moretto & G. Rossini, 2015. "Vertical flexibility, outsourcing and the financial choices of the firm," Working Papers wp1009, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. Stenbacka, Rune & Tombak, Mihkel, 2012. "Make and buy: Balancing bargaining power," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 391-402.
    10. Cosimo Beverelli & Kornel Mahlstein, 2011. "Outsourcing and Competition Policy," Journal of Industry, Competition and Trade, Springer, vol. 11(2), pages 131-147, June.
    11. Rossini Gianpaolo & Vergari Cecilia, 2011. "Input Production Joint Venture," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-50, March.
    12. Benaroch, Michel & Webster, Scott & Kazaz, Burak, 2012. "Impact of sourcing flexibility on the outsourcing of services under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 219(2), pages 272-283.
    13. Alvarez, Luis H.R. & Stenbacka, Rune, 2007. "Partial outsourcing: A real options perspective," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 91-102, February.
    14. Tomiura, Eiichi, 2009. "Foreign versus domestic outsourcing: Firm-level evidence on the role of technology," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 219-226, March.
    15. Rosar, Frank, 2017. "Strategic outsourcing and optimal procurement," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 91-130.

    More about this item

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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