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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 23, No. 4, pp.439-459
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2010
Received 31 Aug 2009 Revised 13 Nov 2009 Accepted 24 Nov 2009

Outsourcing versus In-house Production: The Case of Product Differentiation with Cost Uncertainty

Kojun Hamada
Associate Professor, Faculty of Economics, Niigata University, 8050 Ikarashi 2-no-cho, Nishi-ku, Niigata City 950-2181, Japan, Tel: +81-25-262-6538, Fax: +81-25-262-6538 khamada@econ.niigata-u.ac.jp

JEL Classification: D43, D82, L13

Abstract

The paper examines the relationship between the choice of outsourcing versus in-house production and product differentiation. We analyze the situation where a manufacturer decides between in-house production and outsourcing when faced with cost uncertainty and competition with a rival manufacturer in a differentiated goods market. We show that the degree of product differentiation does not affect the choice between in-house production and outsourcing. The result suggests that regardless of the intensity of competition, the manufacturer should decide on outsourcing if the degree of the cost efficiency of outsourcing exceeds certain thresholds.

Keywords:

In-house production, Outsourcing, Asymmetric information, Cost uncertainty, Differentiated-goods duopoly

Acknowledgments

I am grateful to the two anonymous referees who helped us improve the quality of the paper. I would also like to thank Kazumi Hori, Hideshi Itoh, Shinsuke Kambe, Noriaki Matsushima, and the participants of the seminar on Contract Theory Workshop for their useful comments and suggestions on the previous version of this paper. Any remaining errors are mine.

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