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Strategic outsourcing and quality choice: Is a vertical integration model sustainable?
Author(s) -
Miyamoto Yoshinari
Publication year - 2021
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.3312
Subject(s) - outsourcing , vertical integration , subgame perfect equilibrium , industrial organization , quality (philosophy) , competition (biology) , product differentiation , outcome (game theory) , business , microeconomics , product (mathematics) , production (economics) , economics , marketing , nash equilibrium , cournot competition , ecology , philosophy , geometry , epistemology , biology , mathematics
This paper uses two versions of a vertical product differentiation model with price competition to investigate how strategic behavior between rival firms influences which organizational production mode each firm adopts: that is, either vertical integration or outsourcing. We show that not only a symmetric configuration, where both high‐ and low‐quality firms outsource, but also an asymmetric configuration, where the high‐quality firm produces in‐house whereas the low‐quality firm outsources, are acceptable as a subgame‐perfect equilibrium outcome. We explore the implications of these results in light of the recent slump in business of Japanese electronics enterprises in the flat‐panel television industry.