Welfare implications of strategic outsourcing in oligopolistic markets

This paper shows the strategic aspects of outsourcing in duopolistic markets, where the production choice is driven by the different costs of integrated production and outsourcing. Thus, the resulting production structure depends on the relationship of the costs, i.e. the difference of fixed costs versus the difference of marginal costs. However, the choice of the firms affects also the consumer, since the output price is affected by the costs. Therefore, we also analyze the welfare implications of the different constellations concerning the production strategies. If the optimal decisions of the firms are characterized by different production modes, this constellation is always superior to a constellation with symmetric strategies. On the other hand, if the optimal decisions of the firms are characterized by symmetric production modes, this constellation can be inferior or superior to a constellation with asymmetric strategies.