Strategic outsourcing with technology transfer under price competition

Consider a framework where two firms produce differentiated goods and compete in prices, and one of them possesses input production technology, superior to that of an existing independent input supplier. We show that the superior technology owning firm can sell its patent to and outsource inputs from the input supplier. This happens if the degree of product differentiation is small or the technological gap between the two input producing firms is small. While the outsourcing firm gains, both consumers' welfare and social welfare go down. Interestingly, sometimes the rival firm's profit increases. These results have implications for competition policy.