This paper analyzes a sequential game where firms decide about outsourcing the production of a non-specific input good to an imperfectly competitive input market. We apply the taxonomy of business strategies introduced by Fudenberg and Tirole (1984) to characterize the different equilibria and find that outsourcing generally softens competition in the final product market. If firms anticipate the impact of their outsourcing decisions on input prices, there may be equilibria where firms outsource so as to collude or to raise rivals' costs. We illustrate our analysis using a linear Cournot model.

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We investigate how various institutional settings affect a network provider's incentives to invest in infrastructure quality. Under reasonable assumptions on demand, investment incentives turn out to be smaller under vertical separation than under vertical integration, though we also provide counterexamples. The introduction of downstream competition for the market can sometimes improve incentives. With suitable non-linear access prices investment incentives under separation become identical to those under integration. D