Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148210
Authors: 
Matsushima, Noriaki
Pan, Cong
Year of Publication: 
2016
Series/Report no.: 
ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 983
Abstract: 
Although outsourcing input production has long been considered as an important approach to help downstream manufacturers enhance structural efficiency, we provide a theoretical explanation for why outsourcing may negatively affect downstream firms' profitability. We consider a duopoly model wherein downstream manufacturers endogenously determine their input sourcing and product positioning strategies. We show that when inputs from outside suppliers are not perfectly compatible with downstream manufacturers' requests, outsourcing causes downstream manufacturers to pursue aggressive product positioning behavior, leading to the prisoner's dilemma - even though both downstream manufacturers could be better off producing inputs in-house, they may still choose outsourcing.
Subjects: 
Outsourcing
Product differentiation
Suppliers
Hotelling model
JEL: 
C72
L13
M31
Document Type: 
Working Paper

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