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Strategic Perils of Outsourcing: Sourcing Strategy and Product Positioning

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  • Noriaki Matsushima
  • Cong Pan

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.

Suggested Citation

  • Noriaki Matsushima & Cong Pan, 2016. "Strategic Perils of Outsourcing: Sourcing Strategy and Product Positioning," ISER Discussion Paper 0983, Institute of Social and Economic Research, Osaka University.
  • Handle: RePEc:dpr:wpaper:0983
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    File URL: http://www.iser.osaka-u.ac.jp/library/dp/2016/DP0983.pdf
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    References listed on IDEAS

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    1. Bonaccorsi, Andrea & Giuri, Paola, 2001. "The long-term evolution of vertically-related industries," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1053-1083, July.
    2. Eaton, B Curtis & Schmitt, Nicolas, 1994. "Flexible Manufacturing and Market Structure," American Economic Review, American Economic Association, vol. 84(4), pages 875-888, September.
    3. Jose A. Belso-Martinez, 2010. "Outsourcing Decisions, Product Innovation and the Spatial Dimension: Evidence from the Spanish Footwear Industry," Urban Studies, Urban Studies Journal Limited, vol. 47(14), pages 3057-3077, December.
    4. Christina L. Ahmadjian & James R. Lincoln, 2001. "Keiretsu, Governance, and Learning: Case Studies in Change from the Japanese Automotive Industry," Organization Science, INFORMS, vol. 12(6), pages 683-701, December.
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    Cited by:

    1. Takeshi Ebina & Noriaki Matsushima, 2017. "Product differentiation and entry timing in a continuous-time spatial competition model with vertical relations," ISER Discussion Paper 1009, Institute of Social and Economic Research, Osaka University.
    2. Lee, Sang-Ho & Matsumura, Toshihiro & Park, Chul-Hi, 2017. "Procurement of Advanced Technology and Welfare-Reducing Vertical Integration," MPRA Paper 79109, University Library of Munich, Germany.

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