Learning by Supplying and Competition Threat

Abstract

This study proposes a model of learning by supplying in an international outsourcing framework, where the supplier of a relationship-specific input can reverse engineer and become a competitor to its partner in the final goods market. Transmitting knowledge to a more capable supplier therefore creates competitive threat despite the benefits it brings within an outsourcing relationship. In particular, in markets with less differentiated products and for standard inputs that require less knowledge to be shared, choosing an intermediate capability level supplier prompts a strategic expansion of output to deter supplier entry in the final goods market, resulting in higher profits and welfare. A highly capable supplier is instead accommodated as a rival and is a source of royalty income when the relationshipspecific input embeds more knowledge about the final product and when the competing varieties are differentiated.

Keywords: Supplier heterogeneity, Competitive threat, Reverse engineering, Strategic predation, Technological capability, Learning by supplying, Royalty payment, Knowledge intensity, International outsourcing

JEL Classification: F12, F23, L13, L22, L24, D23, O34