Mutual Outsourcing in Network Industries: Cournot versus Stackelberg Competition

This paper studies mutual outsourcing between competing firms in a differentiated network duopoly and examines how positive network externalities interact with the timing of quantity competition. Firms first choose the outsourcing prices charged to their rivals and then compete either simultaneously à la Cournot or sequentially à la Stackelberg. We show that stronger network effects increase equilibrium output and profits under both competitive regimes, but have non-monotonic effects on outsourcing prices. Under Cournot competition, the equilibrium outsourcing price increases with network intensity when network effects are weak and decreases once they become sufficiently strong. Under Stackelberg competition, outsourcing incentives become asymmetric: the leader’s outsourcing price is non-increasing in network intensity, while the follower’s price may exhibit a threshold effect. The comparison across market structures further reveals that network effects can reverse both outsourcing-price and profit rankings. In particular, the Stackelberg leader always earns more than under Cournot competition, whereas sufficiently strong network effects allow the follower first to outperform the Cournot benchmark and eventually to earn more than the leader. The analysis highlights a strategic trade-off specific to network industries: firms balance the incentive to raise a rival’s input cost against the need to preserve the common installed base that supports market demand.