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Outsourcing induced by strategic competition

  • Chen, Yutian
  • Dubey, Pradeep
  • Sen, Debapriya

We show that intermediate goods can be sourced to firms on the "outside" (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that "inside" firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside.

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File URL: http://mpra.ub.uni-muenchen.de/14899/1/MPRA_paper_14899.pdf
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File URL: http://mpra.ub.uni-muenchen.de/24108/1/MPRA_paper_24108.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14899.

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Date of creation: 24 Apr 2009
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Handle: RePEc:pra:mprapa:14899
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  1. Vidal, Carlos J. & Goetschalckx, Marc, 1997. "Strategic production-distribution models: A critical review with emphasis on global supply chain models," European Journal of Operational Research, Elsevier, vol. 98(1), pages 1-18, April.
  2. Rey, Patrick & Tirole, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005.
  3. Arya, Anil & Mittendorf, Brian & Sappington, David E.M., 2008. "Outsourcing, vertical integration, and price vs. quantity competition," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 1-16, January.
  4. van Damme, E.E.C. & Hurkens, S., 1998. "Endogenous Stackelberg leadership," Other publications TiSEM fc1a6ca3-d618-4bc5-a115-f, Tilburg University, School of Economics and Management.
  5. Pierce, Andrea & Sen, Debapriya, 2009. "Outsourcing versus technology transfer: Hotelling meets Stackelberg," MPRA Paper 15673, University Library of Munich, Germany.
  6. Pal, Debashis, 1996. "Endogenous Stackelberg Equilibria with Identical Firms," Games and Economic Behavior, Elsevier, vol. 12(1), pages 81-94, January.
  7. 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.
  8. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2004. "Trade liberalization and strategic outsourcing," Journal of International Economics, Elsevier, vol. 63(2), pages 419-436, July.
  9. D. Lee Heavner, 2004. "Vertical Enclosure: Vertical Integration and the Reluctance to Purchase from a Competitor," Journal of Industrial Economics, Wiley Blackwell, vol. 52(2), pages 179-199, 06.
  10. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  11. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers 4170, C.E.P.R. Discussion Papers.
  12. Pio Baake & Jörg Oechssler & Christoph Schenk, 1999. "Explaining cross-supplies," Journal of Economics, Springer, vol. 70(1), pages 37-60, February.
  13. Yutian Chen, 2011. "Strategic sourcing for entry deterrence and tacit collusion," Journal of Economics, Springer, vol. 102(2), pages 137-156, March.
  14. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  15. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March.
  16. Haucap, Justus & Buehler, Stefan, 2003. "Strategic Outsourcing Revisited," Working Paper 15/2003, Helmut Schmidt University, Hamburg.
  17. repec:hrv:faseco:4784029 is not listed on IDEAS
  18. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  19. 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.
  20. Shy, Oz & Stenbacka, Rune, 2003. "Strategic outsourcing," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 203-224, February.
  21. Robson, Arthur J, 1990. "Duopoly with Endogenous Strategic Timing: Stackelberg Regained," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 263-74, May.
  22. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  23. Mailath George J., 1993. "Endogenous Sequencing of Firm Decisions," Journal of Economic Theory, Elsevier, vol. 59(1), pages 169-182, February.
  24. repec:ner:tilbur:urn:nbn:nl:ui:12-154410 is not listed on IDEAS
  25. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March.
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