For what kind of intermediate input/service do firms often go outsourcing? This paper develops a model of two-stage production in which economies of scope are central to the production of both the intermediate and final good. The model is able to explain the patterns of outsourcing from the degree of product differentiation, economies of scope, and economies of scale in production of the intermediate input relative to that of the final good. The recent surge of outsourcing activities is explained by a new push (progress in the general purpose technology, e.g., information technology) on an old fundamental (economies of scope in production).

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Keywords Outsourcing, Economies of Scope, Vertical Disintegration, Vertical and, Horizontal Specialization
JEL Organizational Behavior; Transaction Costs; Property Rights (jel D23), Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates (jel L22), International Factor Movements and International Business (jel F2)
Publisher Department of Economics
Series Carleton Economic Papers
Yu, Z. (2003). A New Push on an Old Fundamental: Understanding the Patterns of Outsourcing (No. CEP 03-08). Carleton Economic Papers. Department of Economics.