On the Relationship between International
Outsourcing and Price–Cost Margins
in European Industries
and PETER EGGER
University of Zurich
University of Innsbruck and University of Notre Dame
Abstract. This paper sets up a model, where multinationals compete in quantities and
domestic ﬁrms form a competitive fringe. Within this framework, we analyse the relationship
between market concentration, international outsourcing and the industry price-cost margin.
The empirical results of a panel of 66 industries and the EU12 countries in the 1990s strongly
conﬁrm our theoretical hypotheses. Market concentration and international outsourcing are
positively related to industry price–cost margins. In a thought experiment, we show that
industry price–cost margins would have decreased by 0.4 percentage points more in the 1990s,
if international outsourcing had not changed since 1990. In addition, international out-
sourcing accounts for a convergence in margins across industries in the last decade.
Keywords: international outsourcing, panel econometrics, price–cost margin
JEL Classiﬁcations: F14, F15, F23, L11, C33
‘‘We live in an age of outsourcing’’ (Grossman and Helpman, 2002b, p. 1).
In recent years, this phenomenon has become a key issue in the political and
scientiﬁc debate on possible adverse consequences of globalization, thereby
mainly focussing on wage and employment eﬀects.
However, despite the
salient role of international outsourcing for modern industrial production
(Grossman and Helpman, 2002b, 2003), an empirical assessment of the
relationship between international outsourcing and industrial economic
measures, like the price-cost margin, is so far missing in the literature. To
close this gap is the purpose of this paper.
Author for correspondence: Hartmut Egger, Socioeconomic Institute, University of
Zurich, Zurichbergstr. 14, 8032 Zurich, Switzerland. Tel.: +41-1-634-2303; Fax: +41-1-634-
4996; E-mail: firstname.lastname@example.org
Arndt (1997), Deardorﬀ (2001), Egger and Egger (2001, 2003), Feenstra and Hanson
(1996), Jones (2000), and Venables (1999).
Review of Industrial Organization 25: 45–69, 2004.
Ó 2004 Kluwer Academic Publishers. Printed in the Netherlands.