Outsourcing and Competition Policy |
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Authors: | Cosimo Beverelli Kornel Mahlstein |
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Institution: | (1) Economic Research Division, World Trade Organization, Rue de Lausanne 154, 1211 Geneva, Switzerland;(2) Graduate Institute of International and Development Studies, 11a, Avenue de la Paix, 1202 Geneva, Switzerland |
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Abstract: | We analyze optimal competition policy by a Competition Agency (CA) in a model with two countries, North and South, were a
final good is produced by Northern oligopolistic firms using an input that can either be produced within the firm (vertical
integration) or outsourced to Southern oligopolistic producers with lower labor costs (outsourcing). In the case where the
final good is only consumed in the North, a CA in the South would optimally appropriate outsourcing rents through restrictions
on the degree of competition among domestic firms. If the final good is consumed in both countries, we find that optimal competition
policy in the South is marginally affected by the share of Southern consumption, leaving relatively important incentives to
engage in rent-shifting. For a high enough share of Southern consumption, however, the interaction between the Northern and
Southern CA is shown to be of the Prisoner’s Dilemma type, whereby the Nash equilibrium is Pareto-suboptimal and mutual cooperation
on competition policy is globally desirable. |
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Keywords: | |
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