A Bargaining Perspective on Strategic Outsourcing and Supply Competition (forthcoming)

Catherine C. de Fontenay, Dept. of Economics and Melbourne Busines
Joshua S. Gans, Melbourne Business School, University of Melbourne

Abstract

This paper considers the outsourcing choice of a downstream firm with its own upstream production resources or assets. The novelty of the approach is to consider the outsourced function as involving resources consistent with the resource-based view of the firm. From a bargaining perspective, we characterise a downstream firm's decision as to whether to outsource to an independent or established upstream frim. In so doing, that firm faces a trade-off between lower input costs afforded by independent competition and higher resource value associated to those who can consolidate upstream capabilities. We show that this trade-off is resolved in favour of outsourcing to an established firm.