Partial outsourcing from a rival: Quality decision under product differentiation and information asymmetry

Document Type

Article

Publication Title

European Journal of Operational Research

Abstract

Firms along with producing components in-house source some requirements from a supplier competing in the downstream market (encroachment). However, the supplier may strategically choose not to compete with the manufacturer (no-encroachment). In a stylized game-theoretic model, we characterize component quality decisions of the supplier, a two-part tariff contracting structure, and the market output decisions of both players. We focus on investigating the effect of product quality differentiation and partial outsourcing strategy on the above decisions. We find that product quality may increase or decrease with the increase in product differentiation. Further, we find that the increase in the fraction of requirements outsourced by the manufacturer to the supplier may increase or decrease the product quality. Later, our analysis reveals that when a manufacturer's in-house quality cost is very low, or the degree of product differentiation is in the moderate range, the supplier encroachment could lead to a win-win outcome for both players

Publication Date

1-8-2021

Publisher

Elsevier

Volume

Vol.292

Issue

Iss.3

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