We show that intermediate goods can be sourced to ﬁrms on the “outside” (that do not compete in the ﬁnal product market), even when there are no economies of scale or cost advantages for these ﬁrms. What drives the phenomenon is that “inside” ﬁrms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the ﬁnal product. Thus they have incentive to quote high provider prices to ward oﬀ future competitors, driving the latter to source outside.
Chen, Yutian; Dubey, Pradeep; and Sen, Debapriya, "Outsourcing Induced by Strategic Competition" (2006). Cowles Foundation Discussion Papers. 1882.