Study: Outsourcing hurts consumers by softening competition among firms

Jan 10, 2011

Firms that outsource aspects of their business to a foreign country may profit by saving money, but the practice tends to soften the competition among industry rivals, exacting a hidden cost on consumers, says new research co-written by a University of Illinois business administration professor.

Yunchuan "Frank" Liu says outsourcing hurts society in two ways – it results in lost jobs for workers, and in 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."

The study, which will appear in the journal Management Science, is the first to examine the effects of outsourcing on competition as well as consumers and society, said Liu, who co-wrote the study with Rajeev Tyagi, an economist at the University of California at Irvine.

Liu says that if firms are unwilling to pass along the savings they've reaped from outsourcing production and labor to a cheaper country, all consumers suffer because of softer competition.

"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 outsourcing became a popular strategy for businesses looking to cut costs, competition among firms was more intense.

"Before firms started outsourcing, firms competed head-to-head, and the result of this competition is that businesses were more consumer-centric," Liu said.

But when firms outsource aspects of their , 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."

Liu says that businesses aren't simply pocketing the money they're saving from outsourcing; in some cases, the cost saving from outsourcing is not that significant.

"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."

Liu says that lawmakers need to consider policies that would facilitate open between firms and incentivize satisfying consumers tastes. Otherwise, are better off while consumers suffer.

"For public policymakers, it's just another negative effect of ," he said. "They need to consider not only the Americans who are losing their jobs because of it, but also the who are being gouged."

Explore further: Narcissistic CEOs and financial performance

add to favorites email to friend print save as pdf

Related Stories

Nuanced case for outsourcing by automakers

Dec 30, 2008

Automakers who favor the flexibility and price savings of outsourcing production must weigh carefully the product life cycle implications of sacrificing in-house manufacturing, according to the Management Insights feature ...

Offshoring: Where's the value?

Jul 08, 2008

U.S. firms that offshore customer service may save money on labor costs, but they also pay the price in terms of unhappy customers, say University of Michigan researchers.

Company offers a new kind of outsourcing

May 12, 2006

Outsourcing call centers and software programming has become standard practice for businesses worldwide. Less common is companies outsourcing their R&D.

Recommended for you

Local education politics 'far from dead'

21 hours ago

Teach for America, known for recruiting teachers, is also setting its sights on capturing school board seats across the nation. Surprisingly, however, political candidates from the program aren't just pushing ...

First grade reading suffers in segregated schools

21 hours ago

A groundbreaking study from the Frank Porter Graham Child Development Institute (FPG) has found that African-American students in first grade experience smaller gains in reading when they attend segregated schools—but the ...

Violent aftermath for the warriors at Alken Enge

21 hours ago

Denmark attracted international attention in 2012 when archaeological excavations revealed the bones of an entire army, whose warriors had been thrown into the bogs near the Alken Enge wetlands in East Jutland ...

Why aren't consumers buying remanufactured products?

23 hours ago

Firms looking to increase market share of remanufactured consumer products will have to overcome a big barrier to do so, according to a recent study from the Penn State Smeal College of Business. Findings from faculty members ...

Expecting to teach enhances learning, recall

23 hours ago

People learn better and recall more when given the impression that they will soon have to teach newly acquired material to someone else, suggests new research from Washington University in St. Louis.

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

geokstr
1 / 5 (1) Jan 10, 2011
Liu says that if firms are unwilling to pass along the savings they've reaped from outsourcing production and labor to a cheaper country...

What a joke.

Maybe these "economists" can show us that building computers and other electronic gear in places where they pay their workers 2 handfuls of rice per day, with no benefits, no pensions, no EPA, no OSHA, no unemployment comp, and NO UNIONS, has not resulted in continuously lowering prices and adding features to computers, phones, TVs etc. Or maybe they can show that WalMart keeps their prices low by buying from China until they drive out the competition and then raise them to monopoly pricing.

No? What a freakin' coincidence.

Another "study" by leftwing "intellectuals" to "prove" that the white hegemonist capitalist-roaders are raping the proletariat. Things will be soooo much better when they are in power, redistributing the wealth to the politically connected and politically corrected, to each according to his needs.