STRATEGIC OUTSOURCING AND R&D IN A VERTICAL STRUCTURE*

Arijit Mukherjee and Achintya Ray ()

Manchester School, 2007, vol. 75, issue 3, 297-310

Abstract: It has been argued that a monopolist input supplier may find it profitable to create an outside source for its input if it reduces product price and attracts buyers (Farrell and Gallini, Quarterly Journal of Economics, Vol. 103 (1988), pp. 673–694). We consider a monopolist input supplier's incentive for outsourcing and R&D. We show that even if outsourcing can attract new buyers, it is not beneficial to the input supplier if either the existing final goods market is not very concentrated or cost reduction through R&D is sufficiently large. We further show that while R&D may be preferable to the input supplier, outsourcing may be socially desirable, and thus may create a conflict of interest between the input supplier and the society for R&D and outsourcing.

Date: 2007
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