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Strategic outsourcing and optimal procurement

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  • Rosar, Frank

Abstract

I study a procurement problem where each seller can ex ante decide to become an intermediary by outsourcing production to a subcontractor. Production costs are independently distributed and privately learned by the producer in each supply chain. I provide a rationale for outsourcing that relies on procurement and subcontracting mechanisms being designed in a sequentially rational way but not on cost savings. I show how my rationale extends to the case with cost savings and I discuss the sellers’ incentives to engage in nested outsourcing. The driving force behind my rationale is that outsourcing makes the distribution of a seller’s cost of providing the product more dispersed. I explain also how my analysis extends to problems where such a dispersion arises for other reasons than outsourcing.

Suggested Citation

  • Rosar, Frank, 2017. "Strategic outsourcing and optimal procurement," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 91-130.
  • Handle: RePEc:eee:indorg:v:50:y:2017:i:c:p:91-130 DOI: 10.1016/j.ijindorg.2016.11.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Procurement; Outsourcing; Subcontracting; Auction; Mechanism design; Asymmetric information;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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