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Production costs, scope economies, and multi-client outsourcing under quantity competition

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  • Ni, Debing
  • Li, Kevin W.
  • Tang, Xiaowo
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    Abstract

    Two game models are developed based on production costs and scope economies to investigate the widely observed multi-client outsourcing (MCO) phenomenon. Analytical results demonstrate that outsourcers' high in-house production costs and the advantage of scope economies motivate firms to outsource collectively to an independent vendor. Under certain conditions, if both firms make their outsourcing decisions simultaneously, collective outsourcing is one of the two equilibria; if both firms make decisions sequentially, collective outsourcing becomes the unique equilibrium. Furthermore, the comparative statics of the critical degree of scope economies are examined for the occurrence of MCO with regard to diverse market parameters. Finally, it is proved that market prices decrease as the degree of scope economies increases when MCO occurs. This research helps explain some widely observed phenomena such as malls, supply chain cities, and the China price.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Production Economics.

    Volume (Year): 121 (2009)
    Issue (Month): 1 (September)
    Pages: 130-140

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    Handle: RePEc:eee:proeco:v:121:y:2009:i:1:p:130-140

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    Web page: http://www.elsevier.com/locate/ijpe

    Related research

    Keywords: Scope economies Multi-client outsourcing Game models Subgame perfect equilibrium;

    References

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    1. Jan A. Van Mieghem, 1999. "Coordinating Investment, Production, and Subcontracting," Management Science, INFORMS, vol. 45(7), pages 954-971, July.
    2. Morosini, Piero, 2004. "Industrial Clusters, Knowledge Integration and Performance," World Development, Elsevier, vol. 32(2), pages 305-326, February.
    3. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Panzar, John C & Willig, Robert D, 1981. "Economies of Scope," American Economic Review, American Economic Association, vol. 71(2), pages 268-72, May.
    5. Panzar, John C & Willig, Robert D, 1977. "Economies of Scale in Multi-Output Production," The Quarterly Journal of Economics, MIT Press, vol. 91(3), pages 481-93, August.
    6. Seungjin Whang, 1992. "Contracting for Software Development," Management Science, INFORMS, vol. 38(3), pages 307-324, March.
    7. Stefansson, Gunnar, 2002. "Business-to-business data sharing: A source for integration of supply chains," International Journal of Production Economics, Elsevier, vol. 75(1-2), pages 135-146, January.
    8. Vega-Redondo,Fernando, 2003. "Economics and the Theory of Games," Cambridge Books, Cambridge University Press, number 9780521772518, October.
    9. Sri S. Sridhar & Bala V. Balachandran, 1997. "Incomplete Information, Task Assignment, and Managerial Control Systems," Management Science, INFORMS, vol. 43(6), pages 764-778, June.
    10. Osei-Bryson, Kweku-Muata & Ngwenyama, Ojelanki K., 2006. "Managing risks in information systems outsourcing: An approach to analyzing outsourcing risks and structuring incentive contracts," European Journal of Operational Research, Elsevier, vol. 174(1), pages 245-264, October.
    11. GĂ©rard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    12. Bailey, Elizabeth E & Friedlaender, Ann F, 1982. "Market Structure and Multiproduct Industries," Journal of Economic Literature, American Economic Association, vol. 20(3), pages 1024-48, September.
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    Cited by:
    1. Han, Chaodong & Porterfield, Tobin & Li, Xiaolin, 2012. "Impact of industry competition on contract manufacturing: An empirical study of U.S. manufacturers," International Journal of Production Economics, Elsevier, vol. 138(1), pages 159-169.
    2. Xu, Su Xiu & Lu, Qiang & Huang, George Q. & Zhang, Ting, 2013. "Scope economies, market information, and make-or-buy decision under asymmetric information," International Journal of Production Economics, Elsevier, vol. 145(1), pages 339-348.

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