Dundee Discussion Papers in Economics 251:Economising, strategising and the decision to outsource

We study the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Firms’ mode of operation decision depends on boththe incentive to economize on costs and on strategic considerations. We explore the strategic incentives to outsource and show that asymmetric equilibria emerge, with firms choosing different modes of operation, even when they are ex-ante identical. With ex-ante asymmetries, higher cost firms are more likely to outsource. We apply our model to a number of different international trading setups