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Strategic outsourcing revisited

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  • Buehler, Stefan
  • Haucap, Justus

Abstract

This paper analyzes a sequential game where firms decide about outsourcing the production of a non-specific input good to an imperfectly competitive input market. We apply the taxonomy of business strategies introduced by Fudenberg and Tirole (1984) to characterize the different equilibria. We find that outsourcing generally softens competition in the final product market. If firms anticipate the impact of their outsourcing decisions on input prices, there may be equilibria where firms outsource so as to collude or to raise rivalsâÃÂàcosts. We illustrate our analysis using a linear Cournot model.
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Suggested Citation

  • Buehler, Stefan & Haucap, Justus, 2006. "Strategic outsourcing revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 325-338, November.
  • Handle: RePEc:eee:jeborg:v:61:y:2006:i:3:p:325-338
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    Cited by:

    1. Buehler, Stefan & Burghardt, Dirk, 2013. "Globalization and Vertical Structure: An Empirical Investigation," Economics Working Paper Series 1310, University of St. Gallen, School of Economics and Political Science.
    2. Chen, Yutian & Dubey, Pradeep & Sen, Debapriya, 2011. "Outsourcing induced by strategic competition," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 484-492, July.
    3. Frode Meland & Odd Straume, 2007. "Outsourcing in contests," Public Choice, Springer, vol. 131(3), pages 315-331, June.
    4. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.
    5. Kabiraj, Tarun & Sinha, Uday Bhanu, 2016. "Strategic outsourcing with technology transfer under price competition," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 281-290.
    6. Gunasekaran, Angappa & Irani, Zahir & Choy, King-Lun & Filippi, Lionel & Papadopoulos, Thanos, 2015. "Performance measures and metrics in outsourcing decisions: A review for research and applications," International Journal of Production Economics, Elsevier, vol. 161(C), pages 153-166.
    7. Tarun Kabiraj & Uday Bhanu Sinha, 2017. "Outsourcing Under Incomplete Information," Working Papers id:12217, eSocialSciences.
    8. Angela Triguero, & Carmen DÌaz Mora, "undated". "Why do some firms contract out production?," Studies on the Spanish Economy 232, FEDEA.
    9. Tarun Kabiraj & Uday Bhanu Sinha, 2014. "Strategic Outsourcing with Technology Transfer under Cournot Competition," Economics Bulletin, AccessEcon, vol. 34(2), pages 1133-1140.
    10. Simon Loertscher & Yves Schneider, 2005. "Switching Costs, Firm Size, and Market Structure," SOI - Working Papers 0508, Socioeconomic Institute - University of Zurich.
    11. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.
    12. Yen-Ju Lin & Yan-Shu Lin & Kuang-I Tu, 2016. "Strategic input outsourcing and equilibrium location choice," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 83-99, January.
    13. repec:eee:apmaco:v:292:y:2017:i:c:p:294-308 is not listed on IDEAS
    14. repec:eee:reveco:v:53:y:2018:i:c:p:16-24 is not listed on IDEAS
    15. Anil Arya & Brian Mittendorf & David E. M. Sappington, 2008. "The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier," Management Science, INFORMS, vol. 54(10), pages 1747-1758, October.
    16. Uday Bhanu Sinha, 2016. "Economies of Scale and (Non)Existence of Strategic Outsourcing in Cournot Duopoly," Economics Bulletin, AccessEcon, vol. 36(3), pages 1260-1266.
    17. Tarun Kabiraj & Uday Bhanu Sinha, 2011. "Strategic Outsourcing with Technology Transfer," Working papers 203, Centre for Development Economics, Delhi School of Economics.
    18. C. Díaz-Mora & A. Triguero-Cano, 2012. "Why do some firms contract out production? Evidence from firm-level panel data," Applied Economics, Taylor & Francis Journals, vol. 44(13), pages 1631-1644, May.
    19. João Teixeira, 2014. "Outsourcing with debt financing," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 13(1), pages 1-24, April.
    20. Yutian Chen & Debapriya Sen, 2015. "Strategic Outsourcing Under Economies Of Scale," Bulletin of Economic Research, Wiley Blackwell, vol. 67(2), pages 134-145, April.
    21. Rosar, Frank, 2017. "Strategic outsourcing and optimal procurement," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 91-130.
    22. Chen Yutian & Sen Debapriya, 2012. "Outsourcing and Downstream R&D under Economies of Scale," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-33, September.
    23. Kopel, Michael & Löffler, Clemens & Pfeiffer, Thomas, 2016. "Sourcing strategies of a multi-input-multi-product firm," Journal of Economic Behavior & Organization, Elsevier, vol. 127(C), pages 30-45.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • 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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