Working Paper

A Simple Model of Outsourcing with Cournot Competition

Kiel Working Papers, 1320

The paper analyses a partial equilibrium outsourcing model with Cournot competition in

intermediate good production. Final production is located in western Europe, whereas the

intermediate good can be manufactured by a western (outsourcing) or eastern European supplier

(offshore outsourcing). Interregional production (factor) allocation depending on factor prices and

productivity levels is investigated analytically and graphically. The main results are: Higher

production costs in one region reduce intermediate good production in both regions leading to a

substitution effect between high- and low-skilled labour intensive inputs rather than between eastern

and western low-skilled labour intensive inputs. The sensitivity of outsourcing activities to

production cost changes is highest when the interregional cost differential is smallest.


Michael Hübler


Publication Date
JEL Classification
D24, D43, F20, J3