Strategic outsourcing

This study demonstrates how firms use their design of organizational production mode as a strategic instrument. We investigate how the market structure of the input-producing industry affects production efficiency in a differentiated final goods market. We demonstrate how the introduction of competition among input suppliers will achieve the double goal of making components available at average cost without sacrificing the ability to exploit economies of scale because in equilibrium firms will delegate outsourcing of production to a joint subcontractor. This equilibrium is shown to be robust to whether offers are made by subcontractors or by the product market rivals.