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.