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Strategic outsourcing with technology transfer under price competition

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  • Kabiraj, Tarun
  • Sinha, Uday Bhanu

Abstract

We construct a model to show that outsourcing of a crucial input can occur even though it can be produced in-house at a lower cost. There are two firms producing differentiated goods and competing in prices, and only one of them possesses input production technology which is superior to that of an independent input supplier. We show that if the degree of product differentiation is small or the technological gap between two input producing firms is small, strategic outsourcing will occur. Technology transfer in the form of patent sale will act as a commitment that the firm will outsource. While the outsourcing firm gains, consumers’ welfare as well as social welfare goes down. Interestingly, sometimes rival firm’s profit might increase. The paper brings into focus some competition policy concerns.

Suggested Citation

  • Kabiraj, Tarun & Sinha, Uday Bhanu, 2014. "Strategic outsourcing with technology transfer under price competition," MPRA Paper 59353, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:59353
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Tarun Kabiraj & Uday Bhanu Sinha, 2017. "Outsourcing under incomplete information," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 10(1), pages 3-15, April.
    2. Kabiraj, Tarun & Sinha, Uday Bhanu, 2016. "Strategic outsourcing with technology transfer under price competition," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 281-290.
    3. Colombo, Stefano & Scrimitore, Marcella, 2018. "Managerial delegation under capacity commitment: A tale of two sources," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 149-161.
    4. Hyun-Joon Jo & Timothy Connerton & Hyun-Jung Kim, 2019. "Dynamic Outsourcing Development for Sustainable Competitive Advantage in a High-Tech Backend Semiconductor Equipment Firm," Sustainability, MDPI, vol. 12(1), pages 1-13, December.
    5. Tarun Kabiraj & Uday Bhanu Sinha, 2014. "Strategic Outsourcing with Technology Transfer under Cournot Competition," Economics Bulletin, AccessEcon, vol. 34(2), pages 1133-1140.
    6. Cao, Jiyun & Mukherjee, Arijit & Sinha, Uday Bhanu, 2018. "Firm-asymmetry and strategic outsourcing," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 16-24.
    7. Wei‐Jen Wen & Wen‐Chieh Lee & Chung‐Yen Lo, 2023. "To make or to buy from a common supplier? Strategic considerations and welfare consequences," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(1), pages 39-61, March.
    8. Yoonho Choi & E. Kwan Choi, 2021. "Selling High-Tech Inputs to the Enemy," CESifo Working Paper Series 8886, CESifo.
    9. Luciano Fanti & Marcella Scrimitore, 2017. "Hiring a manager or not? When asymmetric equilibria arise under outsourcing to a rival," Discussion Papers 2017/220, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    10. Agata Marcysiak, 2020. "Conditions for the functioning of outsourcing in enterprises," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(1), pages 539-554, September.
    11. Tai‐Liang Chen & Zuyi Huang, 2020. "Technology licensing or cost‐reducing outsourcing? Game theoretical analysis on consumers' home bias effects and firms' optimal strategies," Bulletin of Economic Research, Wiley Blackwell, vol. 72(4), pages 417-433, October.
    12. Choi, Yoonho & Choi, E. Kwan, 2021. "Selling high-tech inputs to the enemy," International Journal of Production Economics, Elsevier, vol. 234(C).

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    More about this item

    Keywords

    Outsourcing; patent transfer; price competition; welfare; competition policy.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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