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By outsourcing key intermediate goods to a downstream competitor, a firm
can credibly reveals its future quantity of the final good to its competitor,
therefore force the latter to act as a Stackelberg follower in the downstream
market. As a result, whether outsourcing occurs or not depends on the nature
of the downstream competition. If firms compete in quantities, outsourcing
occurs only if it generates a sufficiently large efficiency gain. Instead, if firms
compete in prices, outsourcing always occurs whenever there is potential
efficiency gain.
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