Strategic Outsourcing Revisited

Posted: 11 Dec 2004

See all articles by Stefan Buehler

Stefan Buehler

University of St. Gallen - SEPS: Economics and Political Sciences

Justus Haucap

Heinrich Heine University Dusseldorf - Department of Economics; German Institute for Economic Research (DIW Berlin)

Abstract

This paper analyzes a sequential game where firms decide about outsourcing the production of a non-specific input good to an imperfectly competitive input market. We apply the taxonomy of business strategies introduced by Fudenberg and Tirole (1984) to characterize the different equilibria and find that outsourcing generally softens competition in the final product market. If firms anticipate the impact of their outsourcing decisions on input prices, there may be equilibria where firms outsource so as to collude or to raise rivals' cost. We illustrate our analysis using a linear Cournot model.

Keywords: Outsourcing, oligopoly, business strategy, input prices, vertical structure

JEL Classification: D43, L22, L23, L24

Suggested Citation

Buehler, Stefan and Haucap, Justus, Strategic Outsourcing Revisited. Available at SSRN: https://ssrn.com/abstract=630401

Stefan Buehler (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

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Justus Haucap

Heinrich Heine University Dusseldorf - Department of Economics ( email )

Duesseldorf
Germany

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German Institute for Economic Research (DIW Berlin) ( email )

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