TY - JOUR
T1 - Horizontal outsourcing and price competition
T2 - The role of sole sourcing commitment
AU - Hu, Qiaohai
AU - Kouvelis, Panos
AU - Xiao, Guang
AU - Guo, Xiaomeng
N1 - Funding Information:
The authors thank the department editor Prof. Haresh Gurnani and the anonymous review team for their very helpful and constructive comments. The original submission to POM was a paper draft by Joice Hu, Panos Kouvelis, and Guang Xiao (names in alphabetical order). In subsequent revisions, Xiaomeng Guo was instrumental with the majority of substantive changes (with her name appearing last due to chronological order she joined the authors team). The final publication is the product of equal contributions of all authors. This research was funded through The Boeing Center for Supply Chain Innovation (BCSCI), Olin Business School, Washington University in St. Louis, and the Research Grants Council of Hong Kong (General Research Fund Grants PolyU 15505621 and PolyU 15501820).
Funding Information:
The authors thank the department editor Prof. Haresh Gurnani and the anonymous review team for their very helpful and constructive comments. The original submission to POM was a paper draft by Joice Hu, Panos Kouvelis, and Guang Xiao (names in alphabetical order). In subsequent revisions, Xiaomeng Guo was instrumental with the majority of substantive changes (with her name appearing last due to chronological order she joined the authors team). The final publication is the product of equal contributions of all authors. This research was funded through The Boeing Center for Supply Chain Innovation (BCSCI), Olin Business School, Washington University in St. Louis, and the Research Grants Council of Hong Kong (General Research Fund Grants PolyU 15505621 and PolyU 15501820).
Publisher Copyright:
© 2022 Production and Operations Management Society.
PY - 2022/8
Y1 - 2022/8
N2 - Previous studies on horizontal outsourcing between competing duopolists emphasize cost factors, such as economies of scale and/or variable cost advantages in Cournot markets, as potential explanations. Our paper studies horizontal outsourcing when two competing firms engage in Bertrand competition, and highlights the important role of sole sourcing commitment. We adopt the framework of a multistage duopoly game that comprises of an incumbent and an entrant. The incumbent has the capability to make a key component in-house, and the entrant, who is a rival of the incumbent in the downstream market, can source the component from either the incumbent or a supplier not participating in the end-product market. We find that if the entrant commits to sole sourcing, horizontal outsourcing can occur when the incumbent has a component cost advantage or even a small cost disadvantage over the alternative supplier. Specifically, if the component cost gap is small, horizontal outsourcing may soften downstream market competition and benefit both firms at the expense of inducing higher prices for the consumers. If the incumbent has a significant cost advantage, horizontal outsourcing may lead to an increased downstream price war by expanding the total supply of end products. Without sole sourcing commitment, horizontal outsourcing occurs only when the incumbent has a cost advantage, and it always strengthens downstream price competition. By contrast, if the firms engage in downstream Cournot competition, sole sourcing commitment has no impact on the adoption of horizontal outsourcing, and the entrant sources from her rival only when the incumbent enjoys a significant cost advantage. Finally, we also study various extensions to check and confirm the robustness of our main results to key model assumptions.
AB - Previous studies on horizontal outsourcing between competing duopolists emphasize cost factors, such as economies of scale and/or variable cost advantages in Cournot markets, as potential explanations. Our paper studies horizontal outsourcing when two competing firms engage in Bertrand competition, and highlights the important role of sole sourcing commitment. We adopt the framework of a multistage duopoly game that comprises of an incumbent and an entrant. The incumbent has the capability to make a key component in-house, and the entrant, who is a rival of the incumbent in the downstream market, can source the component from either the incumbent or a supplier not participating in the end-product market. We find that if the entrant commits to sole sourcing, horizontal outsourcing can occur when the incumbent has a component cost advantage or even a small cost disadvantage over the alternative supplier. Specifically, if the component cost gap is small, horizontal outsourcing may soften downstream market competition and benefit both firms at the expense of inducing higher prices for the consumers. If the incumbent has a significant cost advantage, horizontal outsourcing may lead to an increased downstream price war by expanding the total supply of end products. Without sole sourcing commitment, horizontal outsourcing occurs only when the incumbent has a cost advantage, and it always strengthens downstream price competition. By contrast, if the firms engage in downstream Cournot competition, sole sourcing commitment has no impact on the adoption of horizontal outsourcing, and the entrant sources from her rival only when the incumbent enjoys a significant cost advantage. Finally, we also study various extensions to check and confirm the robustness of our main results to key model assumptions.
KW - Bertrand competition
KW - dual sourcing
KW - horizontal outsourcing
KW - sole sourcing commitment
UR - http://www.scopus.com/inward/record.url?scp=85131206917&partnerID=8YFLogxK
U2 - 10.1111/poms.13746
DO - 10.1111/poms.13746
M3 - Journal article
AN - SCOPUS:85131206917
SN - 1059-1478
VL - 31
SP - 3198
EP - 3216
JO - Production and Operations Management
JF - Production and Operations Management
IS - 8
ER -