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Outsourcing versus technology transfer: Hotelling meets Stackelberg

Author

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  • Pierce, Andrea
  • Sen, Debapriya
Abstract
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 technology transfer (B transfers its technology to A). First we show that an outsourcing order acts as a credible commitment on part of A to maintain a certain market share in the final good market. This generates an indirect Stackelberg leadership effect, which is absent in a technology transfer contract. We show that compared to the situation of no contracts, there are always Pareto improving outsourcing contracts but no Pareto improving technology transfer contracts. Finally, it is shown that whenever both firms prefer one of the two contracts, all consumers prefer the other contract.

Suggested Citation

  • Pierce, Andrea & Sen, Debapriya, 2009. "Outsourcing versus technology transfer: Hotelling meets Stackelberg," MPRA Paper 15673, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15673
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    Cited by:

    1. Chen, Yutian & Dubey, Pradeep & Sen, Debapriya, 2011. "Outsourcing induced by strategic competition," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 484-492, July.
    2. Yen-Ju Lin & Yan-Shu Lin & Kuang-I Tu, 2016. "Strategic input outsourcing and equilibrium location choice," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 83-99, January.
    3. Kabiraj, Tarun & Sinha, Uday Bhanu, 2016. "Strategic outsourcing with technology transfer under price competition," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 281-290.
    4. Yen-Ju Lin & Yan-Shu Lin & Kuang-I Tu, 2016. "Strategic input outsourcing and equilibrium location choice," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 56(1), pages 83-99, January.

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    More about this item

    Keywords

    Outsourcing; Technology transfer; Hotelling duopoly; Stackelberg effect; Pareto improving contracts;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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