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Outsourcing and Competition Policy

Cosimo Beverelli Kornel Mahlstein
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Cosimo Beverelli Kornel Mahlstein: Graduate Institute of International Studies, Geneva

Authors registered in the RePEc Author Service: Cosimo Beverelli () and Kornel Mahlstein ()

No 11-2007, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: We analyze optimal competition policy by a Competition Agency (CA) in a model with two countries, North and South, where a final good is produced by Northern oligopolistic firms using an input that can either be produced within the firm (vertical integration) or outsourced to Southern oligopolistic producers with lower labor costs (outsourcing). In the case where the final good is only consumed in the North and there is free entry in the South, we find that optimal competition policy in the North is the adoption of a tougher stance. However, with a CA in the South, the Southern CA would optimally appropriate outsourcing rents through restrictions on the degree of competition among domestic firms. In this case the optimal response of the Northern CA would be inaction. In the case where the final good is consumed in both countries, we find that optimal competition policy is marginally affected by the share of Southern consumption, leaving relatively important incentives to engage in rent-shifting. However, for a high enough share of Southern consumption, the interaction between the Northern and Southern CA is shown to be of the Prisoner's Dilemma type, whereby the Nash equilibrium is Pareto-suboptimal and mutual cooperation on competition policy is globally desirable.

Keywords: Competition policy; outsourcing; vertical integration (search for similar items in EconPapers)
Pages: 25
Date: 2007-03, Revised 2007-03
New Economics Papers: this item is included in nep-com and nep-cse
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Journal Article: Outsourcing and Competition Policy (2011) Downloads
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