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A Simple Model of Outsourcing with Cournot Competition

  • Michael Hübler

The paper analyses a partial equilibrium outsourcing model with Cournot competition in intermediate good production. Final production is located in western Europe, whereas the intermediate good can be manufactured by a western (outsourcing) or eastern European supplier (offshore outsourcing). Interregional production (factor) allocation depending on factor prices and productivity levels is investigated analytically and graphically. The main results are: Higher production costs in one region reduce intermediate good production in both regions leading to a substitution effect between high- and low-skilled labour intensive inputs rather than between eastern and western low-skilled labour intensive inputs. The sensitivity of outsourcing activities to production cost changes is highest when the interregional cost differential is smallest.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1320.

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Length: 28 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:kie:kieliw:1320
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