Strategic Outsourcing with Technology Transfer under Cournot Competition

This paper seeks to show that even though a product market competitor holds the least cost input production technology, it may outsource its input production to an independent input producer and buy inputs from the firm at a higher price instead of producing inputs in-house for itself. Technology transfer in the form of patent sale acts as a commitment. Assuming Cournot competition in the product market the paper shows that such an outsourcing occurs when the initial technological gap between the input producing firms is small. Under such strategic outsourcing, however, consumer welfare as well as social welfare goes down.