Outsourcing may increase profits, but softens competition among rivals

WASHINGTON - A new study has revealed that outsourcing certain aspects of a business to a third party may save a firm’s costs, but it softens the competition among industry rivals.

According to Yunchuan “Frank” Liu at University of Illinois and Rajeev Tyagi, an economist at the University of California at Irvine, outsourcing hurts society in two ways - lost jobs for workers and consumers paying higher prices than they should for goods.

“Outsourcing is a topic that affects just about everyone, and the general consensus is that it’s bad because American workers will lose jobs because of it,” he said.

“Most people only focus on the job-displacement angle, but very few people have questioned how it affects consumers and competition in the marketplace.”

“If a firm outsources production to a low-cost country, there’s a cost-saving effect, but there’s also a weakening among on the competition,” Liu said.

“If the competition is softened and the production costs become lower, businesses don’t have an incentive to pass those savings along to consumers,” Liu said.

“In some cases, consumers pay higher prices.”

Before the trend of outsourcing, competition amongst rivals was tough. But when firms outsource aspects of their business, they cease competing head-to-head, as the actual competition grows to include more players, Liu said.

“Once more businesses are involved, even if firms become more customer-focused, if their suppliers don’t cooperate, they can’t lower prices,” he said.

“So firms lose the incentive to become consumer-centric and competitive. And the reason why that happens is that outsourcing softens the competition among rival firms.”

“Some U.S. businesses may outsource to Canada, where the cost-savings are insignificant. Why do firms want to do that? One potential reason is to soften the competition among competing firms, which has the effect of keeping prices artificially higher than they should be,” he said.

Liu concluded that lawmakers have to consider policies that would facilitate open competition between firms and incentivize satisfying consumers.

“For public policymakers, it’s just another negative effect of outsourcing,” he said.

“They need to consider not only the Americans who are losing their jobs because of it, but also the consumers who are being gouged.”

The study will appear in the journal Management Science. (ANI)