Arbeitspapier
A Simple Model of Outsourcing with Cournot Competition
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.