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Strategic outsourcing and optimal procurement

Listed author(s):
  • Rosar, Frank
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167718716303794
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    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 50 (2017)
    Issue (Month): C ()
    Pages: 91-130

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    Handle: RePEc:eee:indorg:v:50:y:2017:i:c:p:91-130
    DOI: 10.1016/j.ijindorg.2016.11.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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