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Study Reveals Outsourcing Impact on Consumers, Competition

by: Karen Cayamanda

Monday, January 17, 2011 |

Companies can reduce costs through outsourcing, but a new research reveals that the process hurts consumers and tends to soften the competition among rivals in the industry.

In a research co-written by Yunchuan "Frank" Liu, a business administration professor in the University of Illinois, it is said that outsourcing leads to loss of jobs and higher prices. "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." He added that in some cases, consumers pay higher prices.

Before outsourcing, the competition was more intense and businesses were more consumer-centric. According to Liu, when firms start outsourcing business functions to low-cost countries, the competition softens as more companies enter the scene.

Liu co-wrote the research with economist Rajeev Tyagi at the University of California. The study will be published in the journal called Management Science.


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