Working Paper No. 02-23

Trade Liberalization and Strategic Outsourcing
Yongmin Chen, Jota Ishikawa, and Zhihao Yu
November 2002

ABSTRACT

This paper develops a model of strategic outsourcing. With trade liberalization in the intermediate-product market, a domestic firm may choose to purchase a key intermediate good from a more efficient foreign producer, who also competes with the domestic firm for a final good. This has a strategic effect on competition. Unlike the outsourcing motivated by cost saving, the strategic outsourcing has a collusive effect that could raise the prices of both intermediate and final goods. Trade liberalization in the intermediate-good market could have a very different effect compared with trade liberalization in the final-good market.

JEL classification: F12, F13.
Keywords: outsourcing, vertical oligopolies, collusive effect.

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