Journal
INTERNATIONAL JOURNAL OF PRODUCTION RESEARCH
Volume 53, Issue 12, Pages 3635-3650Publisher
TAYLOR & FRANCIS LTD
DOI: 10.1080/00207543.2014.985394
Keywords
game theory; outsourcing; supply chain management
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We examine outsourcing strategies of two competing firms. Each of the firms outsources product manufacturing to one of the two manufacturers. In addition to product manufacturing, the first manufacturer also produces a key component that is required by every product. On the other hand, the second manufacturer provides additional services that enhance product value. We characterise the firms' equilibrium choice of outsourced manufacturers. We demonstrate that difference in the manufacturers' operational advantages can result in asymmetric outsourcing decisions for ex-ante symmetric firms. Firm profitability can be Pareto improved when the manufacturer who produces the key component gains first-mover advantage. Moreover, that manufacturer can benefit from the entrance of a competitor in the key component market. Finally, even though the firms select their outsourced manufacturers based on self-interest, the resulting equilibrium outsourcing scenario can be the one that also maximises profitability of the manufacturers and the entire supply chain.
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