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Outsourcing without cost advantages

Author

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  • Milliou, Chrysovalantou

Abstract

This paper explores why competing firms outsource to an external common supplier that does not have a cost advantage relative to them in input production. The supplier, through its contract offers, manages to generate asymmetry, to alter product market competition, and to extract profits from the competing firms. Two-part tariffs and sequential contracting are both crucial for the emergence of outsourcing. The supplier purposefully avoids industry profit maximization to enlarge its profits share. Both consumer and total welfare benefit from the presence of an otherwise redundant supplier in the market.

Suggested Citation

  • Milliou, Chrysovalantou, 2026. "Outsourcing without cost advantages," International Journal of Industrial Organization, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:indorg:v:104:y:2026:i:c:s0167718725001110
    DOI: 10.1016/j.ijindorg.2025.103245
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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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