Economies of Scope and Patterns of Global Outsourcing

This paper develops a model with two Salop circles representing the product space of the intermediate input suppliers and the final‐good producers. First, it is shown that economies of scope in production are the necessary condition for outsourcing. Second, the propensity to outsource exhibits a U ‐shape relationship depending on an intricate combination of the degree of economies of scope and product differentiation of the intermediate input suppliers. Third, an improvement of production technology can have ambiguous effects on the propensity to outsource.