Outsourcing occurs in several industries such as aviation, automobiles, computers and electronics. Among some well-known cases, consider the aircraft giant Boeing, which outsources products of over 34,000 components to different manufacturers for the production of 747 passenger aircraft. It is particularly interesting to note that Boeing signed agreements with a Japanese consortium1 whose costs are just as high as or higher than Boeing. According to the agreements, Boeing would purchase from them the 767-X fuselage during the 1990s, and then wings, together with related research and development during the 2000s (Chen, 2011). In computer industry Sun purchases about 75% of components from other companies. It is also common that outsourcing activities sometimes take place in a manner where the arch rivals purchases from common suppliers. For example, in 2004, Shanghai Automotive Industry Corporation (SAIC) manufactured for Volkswagen and GM.2 In the United States, more than 60% of auto parts suppliers make components for the big three car manufacturers, viz., GM, Chrysler and Ford (Alexandrov, 2010). Spirit AeroSystems Inc., the world’s largest first-tier aerostructures manufacturer and the former Boeing Commercial Airplanes site that was divested from Boeing in 2005, is a supplier of fuselage sections for both Boeing and Airbus. Conventional wisdom suggests that the sourcing decision (i.e., producing in-house or purchasing from an outside supplier) may simply be a matter of choosing the least cost alternative by comparing internal production costs with the prices charged by the independent suppliers.4 However, in today’s world where strategic interactions among the final goods producers are evident, we show that a final goods producer may outsource input production to an outside supplier even if the final goods producer possesses a superior inputproduction technology compared to the outside supplier. The final goods producer with a superior input-production technology does this in order to get a strategic advantage in the final goods market.