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...

We demonstrate that a downstream firm (an incumbent) may source to an upstream firm (a potential entrant) for the sole purpose of entry deterrence. The reason is that, on the one hand, as a supplier, the potential entrant would have a second mover's disadvantage upon its entry into the...