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Horizontal Subcontracting

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  • Yossef Spiegel

Abstract

Horizontal subcontracting agreements between rival firms, each of which is capable of producing and marketing its products independently, are common. This article explains this practice and evaluates its welfare implications. The analysis shows that firms with asymmetric convex costs can use horizontal subcontracting to allocate production more efficiently between them and consequently generate a mutually beneficial surplus. For a wide range of parameters, this increase in production efficiency leads to an increase in industry output. The counterintuitive result is that welfare is thereby enhanced. In fact, when industry output falls, welfare can still increase if production costs are sufficiently lowered.

Suggested Citation

  • Yossef Spiegel, 1993. "Horizontal Subcontracting," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 570-590, Winter.
  • Handle: RePEc:rje:randje:v:24:y:1993:i:winter:p:570-590
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    Citations

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    Cited by:

    1. Justin Marion, 2015. "Sourcing from the Enemy: Horizontal Subcontracting in Highway Procurement," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 100-128, March.
    2. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.
    3. repec:eee:reveco:v:49:y:2017:i:c:p:58-68 is not listed on IDEAS
    4. Manel Antelo & Lluís Bru, 2018. "Option Contracts in a Vertical Industry," Manchester School, University of Manchester, vol. 86(4), pages 533-557, July.
    5. Niu, Baozhuang & Wang, Yulan & Guo, Pengfei, 2015. "Equilibrium pricing sequence in a co-opetitive supply chain with the ODM as a downstream rival of its OEM," Omega, Elsevier, vol. 57(PB), pages 249-270.
    6. Walter Elberfeld, 2001. "Explaining Intraindustry Differences in the Extent of Vertical Integration," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(3), pages 465-477, September.
    7. Joaquín Andaluz, 2008. "Vertical product differentiation with subcontracting," Documentos de Trabajo dt2008-01, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza.
    8. Xu, Jiayan & Feng, Yinbo & He, Wen, 2017. "Procurement auctions with ex post cooperation between capacity constrained bidders," European Journal of Operational Research, Elsevier, vol. 260(3), pages 1164-1174.
    9. Laura Rondi & Paola Valbonesi, 2017. "Pre- and post-award outsourcing: Temporary partnership versus subcontracting in public procurement," "Marco Fanno" Working Papers 0211, Dipartimento di Scienze Economiche "Marco Fanno".
    10. repec:pal:jorsoc:v:68:y:2017:i:12:d:10.1057_s41274-016-0169-0 is not listed on IDEAS
    11. Erol Taymaz & Yilmaz Kilicaslan, 2001. "Subcontracting dynamics and economic development: A study on textile and engineering industries," ERC Working Papers 0108, ERC - Economic Research Center, Middle East Technical University, revised Aug 2001.
    12. Lim, Wei Shi & Tan, Soo Jiuan, 2010. "Outsourcing suppliers as downstream competitors: Biting the hand that feeds," European Journal of Operational Research, Elsevier, vol. 203(2), pages 360-369, June.
    13. repec:eee:indorg:v:52:y:2017:i:c:p:307-332 is not listed on IDEAS
    14. Fang-yueh Chen & Tsai-chen Shen, 2010. "International Original Equipment Manufacturing And Original Design Manufacturing Contracts With Quality-Differentiated Products," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 305-323, August.
    15. Joaquín Andaluz, 2009. "Vertical product differentiation with subcontracting," Papers in Regional Science, Wiley Blackwell, vol. 88(4), pages 785-798, November.

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