Economies of Scale and (Non)Existence of Strategic Outsourcing in Cournot Duopoly

In the presence of economies of scale, the existence of strategic outsourcing equilibrium in a Cournot duopoly market crucially depends on the existence of input market. We show that when an input market exists with the input supplier charging an appropriate price for the input, the strategic outsourcing equilibrium exists for some values of the parameters. However, if the input supplier and the final good producers all have an identical technology for input production, the paper shows that no strategic outsourcing equilibrium exists and the market becomes either a duopoly or a monopoly with vertically integrated production process.