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Profit reducing international outsourcing

  • Sugata Marjit
  • Arijit Mukherjee

Recent empirical evidence shows a negative relationship between international outsourcing and profitability. This paper provides a theoretical explanation for this phenomenon. We show that, in an oligopolistic market, firms earn lower profits in the outsourcing equilibrium compared to the situation where neither firm does outsourcing, and this holds irrespective of the intensity of competition. We show that whether international outsourcing is likely to reduce profit under more intense competition (measured by the degree of product differentiation, number of firms and the type of product market competition, namely, Cournot and Bertrand competition) is ambiguous. We further show that international outsourcing may be socially 'excessive' for the sourced country and for the world.

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Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 17 (2008)
Issue (Month): 1 ()
Pages: 21-35

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Handle: RePEc:taf:jitecd:v:17:y:2008:i:1:p:21-35
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