Abstract
This paper presents a model in which economies of scope in production play a key role in a vertically-linked production structure. It identifies the divergence in the degrees of economies of scope and the attribute spaces of the products in different stages of production as a fundamental economic force behind outsourcing. Among other things, it is shown that outsourcing occurs in the following two extreme/opposite scenarios in terms of production and characteristics of the good: either (i) the degree of economies of scope is relatively very high and/or the attribute space is very small (i.e., close to a homogenous good), or (ii) the degree of economies of scope is relatively very low and/or the attribute space is very large (i.e. highly specialized input/service).
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