Strategic Outsourcing between Rivals
By outsourcing key intermediate goods to a downstream competitor, a firm can credibly reveals its future quantity of the final good to its competitor, therefore force the latter to act as a Stackelberg follower in the downstream market. As a result, whether outsourcing occurs or not depends on the nature of the downstream competition. If firms compete in quantities, outsourcing occurs only if it generates a sufficiently large efficiency gain. Instead, if firms compete in prices, outsourcing always occurs whenever there is potential efficiency gain.
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