Three essays on the economics of outsourcing of goods and services: An analysis of B2B exchanges, offshoring and allocation of production capacities

Information technology is redefining organizations at the same time as the market for outsourced goods and services is growing at a furious pace. These rapid changes motivate us to analyze the impact that information technology can have on the boundaries of firms. A particularly important question is the effect of information technology on the allocation of production capacity, an issue that has hardly been addressed in the extant literature. The first essay examines the boundaries of manufacturing firms and investigates the impact that a business-to-business private exchange has on the scale of their operations. We demonstrate how the creation of a private electronic exchange can alter the productive capacity of a firm as well as the optimal allocations to competing firms. The second essay models competition in an oligopoly where firms offer vertically differentiated services. We computationally investigate the allocation of the share of production at equilibrium among four production regimes, namely, in-house, on-shore, offshore and automation (utility). Furthermore, the analysis compares the equilibrium shares of allocation for three types of services: Quality Neutral, Context-Sensitive and Judgment-Intensive. Finally, the third essay empirically investigates how different characteristics of a firm result in the allocation of production to in-house, onshore and offshore sites. We build econometric models to determine factors that contribute to high quality of service by a multishore service provider and how information technology affects the channels of information used by different buyer (client) firms.