This paper considers a Hotelling duopoly with two firms A and B in the final good market. Both A and $B$ can produce the required intermediate good, firm B having a lower cost due to a superior technology. We compare two contracts: outsourcing (A orders the intermediate good from B) and...

We consider a Hotelling duopoly with two firms <InlineEquation ID="IEq1"> <EquationSource Format="TEX">$$A$$</EquationSource> </InlineEquation> and <InlineEquation ID="IEq2"> <EquationSource Format="TEX">$$B$$</EquationSource> </InlineEquation> in the final good market. Both can produce the required intermediate good, firm <InlineEquation ID="IEq3"> <EquationSource Format="TEX">$$B$$</EquationSource> </InlineEquation> having a lower cost due to a superior technology. We compare two contracts: outsourcing (<InlineEquation ID="IEq4"> <EquationSource Format="TEX">$$A$$</EquationSource> </InlineEquation> orders the intermediate good from <InlineEquation ID="IEq5"> <EquationSource Format="TEX">$$B$$</EquationSource> </InlineEquation>)...</equationsource></inlineequation></equationsource></inlineequation></equationsource></inlineequation></equationsource></inlineequation></equationsource></inlineequation>

We show that intermediate goods can be sourced to firms on the "outside" (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that "inside" firms, by accepting such orders, incur the...

Economies of scale in upstream production can lead both disintegrated downstream firms as well as its vertically integrated rival to outsource offshore for intermediate goods, even if offshore production has moderate cost disadvantage compared to in-house production of the vertically integrated...

We show that economies of scale in upstream production can lead both the disintegrated downstream firm as well as its vertically integrated rival to outsource offshore for intermediate goods, even if offshore production has a moderate cost disadvantage compared to in‐house production of the...