A simple model of outsourcing with Cournot competition

Michael Hübler

No 1320, Kiel Working Papers from Kiel Institute for the World Economy

Abstract: The paper analyses a partial equilibrium outsourcing model with Cournot competition in intermediate good production. Final production is located in western Europe, whereas the intermediate good can be manufactured by a western (outsourcing) or eastern European supplier (offshore outsourcing). Interregional production (factor) allocation depending on factor prices and productivity levels is investigated analytically and graphically. The main results are: Higher production costs in one region reduce intermediate good production in both regions leading to a substitution effect between high- and low-skilled labour intensive inputs rather than between eastern and western low-skilled labour intensive inputs. The sensitivity of outsourcing activities to production cost changes is highest when the interregional cost differential is smallest.

Keywords: Outsourcing; Cournot competition; Intermediate good; Offshoring (search for similar items in EconPapers)
JEL-codes: D24 D43 F20 J31 (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1320

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