IDEAS home Printed from https://ideas.repec.org/a/bpj/bejtec/v18y2018i2p20n16.html
   My bibliography  Save this article

The Choice of Prices versus Quantities under Outsourcing

Author

Listed:
  • Chang Ray-Yun

    (Department of Economics, Chinese Culture University, Taipei, Taiwan)

  • Hu Jin-Li

    (Institute of Business and Management, National Chiao Tung University, Hsinchu, Taiwan)

  • Lin Yan-Shu

    (Department of Economics, National Dong Hwa University, Hualien, Taiwan)

Abstract

This paper establishes a duopoly model with product differentiation and outsourcing in order to analyze the equilibrium competition strategies (choice of prices versus quantities) when the outsourcer outsources its intermediate good to a final product competitor. We show that: (1) both firms choose the quantity strategy when the cost efficiency of the subcontractor is low; (2) the choice of competition strategy is the price strategy for the subcontractor and the quantity strategy for the outsourcer when the cost efficiency of the subcontractor is moderate; (3) both firms choose the price strategy when the cost efficiency of the subcontractor is sufficiently high.

Suggested Citation

  • Chang Ray-Yun & Hu Jin-Li & Lin Yan-Shu, 2018. "The Choice of Prices versus Quantities under Outsourcing," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(2), pages 1-20, July.
    • Handle: RePEc:bpj:bejtec:v:18:y:2018:i:2:p:20:n:16
    DOI: 10.1515/bejte-2016-0195
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/bejte-2016-0195
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/bejte-2016-0195?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tasnadi, Attila, 2006. "Price vs. quantity in oligopoly games," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 541-554, May.
    2. Thierry Verdier & Mathias Thoenig, 2006. "The Impact of Rules of Origin on Strategic Outsourcing: An IO Perspective," Post-Print halshs-00754742, HAL.
    3. Alessandra Chirco & Caterina Colombo & Marcella Scrimitore, 2014. "Organizational Structure and the Choice of Price versus Quantity in a Mixed Duopoly," The Japanese Economic Review, Japanese Economic Association, vol. 65(4), pages 521-542, December.
    4. Tanaka, Yasuhito, 2001. "Profitability of price and quantity strategies in an oligopoly," Journal of Mathematical Economics, Elsevier, vol. 35(3), pages 409-418, June.
    5. Yutian Chen, 2010. "Strategic Outsourcing between Rivals," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 301-311, November.
    6. Lambertini, Luca, 1997. "Prisoners' Dilemma in Duopoly (Super)Games," Journal of Economic Theory, Elsevier, vol. 77(1), pages 181-191, November.
    7. Chen, Yongmin & Ishikawa, Jota & Yu, Zhihao, 2004. "Trade liberalization and strategic outsourcing," Journal of International Economics, Elsevier, vol. 63(2), pages 419-436, July.
    8. Nakamura, Yasuhiko, 2015. "Price versus quantity in a mixed duopoly: The case of relative profit maximization," Economic Modelling, Elsevier, vol. 44(C), pages 37-43.
    9. Scrimitore, Marcella, 2013. "Price or quantity? The strategic choice of subsidized firms in a mixed duopoly," Economics Letters, Elsevier, vol. 118(2), pages 337-341.
    10. Matsumura, Toshihiro & Ogawa, Akira, 2012. "Price versus quantity in a mixed duopoly," Economics Letters, Elsevier, vol. 116(2), pages 174-177.
    11. Markus Reisinger & Ludwig Ressner, 2009. "The Choice of Prices versus Quantities under Uncertainty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1155-1177, December.
    12. Naimzada, A.K. & Tramontana, F., 2012. "Dynamic properties of a Cournot–Bertrand duopoly game with differentiated products," Economic Modelling, Elsevier, vol. 29(4), pages 1436-1439.
    13. Arijit Mukherjee, 2010. "Competition And Welfare: The Implications Of Licensing," Manchester School, University of Manchester, vol. 78(1), pages 20-40, January.
    14. Piercarlo Zanchettin, 2006. "Differentiated Duopoly with Asymmetric Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(4), pages 999-1015, December.
    15. Boyer, Marcel & Moreaux, Michel, 1987. "On Stackelberg Equilibria with Differentiated Products: The Critical Role of the Strategy Space," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 217-230, December.
    16. Leonard Cheng, 1985. "Comparing Bertrand and Cournot Equilibria: A Geometric Approach," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 146-152, Spring.
    17. de Jong, A. & Nguyen, T.T. & van Dijk, M.A., 2007. "Strategic Debt: Evidence from Bertrand and Cournot Competition," ERIM Report Series Research in Management ERS-2007-057-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    18. Luca Lambertini, 2000. "Strategic Delegation and the Shape of Market Competition," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(5), pages 550-570, November.
    19. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    20. Nisvan Erkal, 2005. "Optimal Licensing Policy in Differentiated Industries," The Economic Record, The Economic Society of Australia, vol. 81(252), pages 51-60, March.
    21. Victor J. Tremblay & Carol Horton Tremblay & Kosin Isariyawongse, 2013. "Cournot and Bertrand Competition when Advertising Rotates Demand: The Case of Honda and Scion," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 20(1), pages 125-141, February.
    22. Chirco, Alessandra & Scrimitore, Marcella, 2013. "Choosing price or quantity? The role of delegation and network externalities," Economics Letters, Elsevier, vol. 121(3), pages 482-486.
    23. Anil Arya & Brian Mittendorf & David E. M. Sappington, 2008. "The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier," Management Science, INFORMS, vol. 54(10), pages 1747-1758, October.
    24. Kangsik Choi, 2012. "Price And Quantity Competition In A Unionised Mixed Duopoly: The Cases Of Substitutes And Complements," Australian Economic Papers, Wiley Blackwell, vol. 51(1), pages 1-22, March.
    25. Alexei Alexandrov, 2013. "Effects of Joint Outsourcing on Consumer Welfare," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 20(2), pages 187-202, July.
    26. Haraguchi, Junichi & Matsumura, Toshihiro, 2014. "Price versus quantity in a mixed duopoly with foreign penetration," Research in Economics, Elsevier, vol. 68(4), pages 338-353.
    27. Li, Changying & Ji, Xiaoming, 2010. "Innovation, licensing, and price vs. quantity competition," Economic Modelling, Elsevier, vol. 27(3), pages 746-754, May.
    28. Paul Klemperer & Margaret Meyer, 1986. "Price Competition vs. Quantity Competition: The Role of Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 618-638, Winter.
    29. Arijit Mukherjee & Udo Broll & Soma Mukherjee, 2012. "Bertrand Versus Cournot Competition In A Vertical Structure: A Note," Manchester School, University of Manchester, vol. 80(5), pages 545-559, September.
    30. Arya, Anil & Mittendorf, Brian & Sappington, David E.M., 2008. "Outsourcing, vertical integration, and price vs. quantity competition," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 1-16, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michael Kopel & Eva Maria Putz, 2021. "Information sharing in a Cournot–Bertrand duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1645-1655, October.
    2. Chia-Jen Chang & Chih-Ta Yen & Yu-Zhen Lin, 2024. "Commodity taxation principle, heterogeneous goods, and endogenous choice between price and quantity contracts," Journal of Economics, Springer, vol. 143(2), pages 111-140, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luciano Fanti & Nicola Meccheri, 2015. "On the Cournot–Bertrand Profit Differential and the Structure of Unionisation in a Managerial Duopoly," Australian Economic Papers, Wiley Blackwell, vol. 54(4), pages 266-287, December.
    2. Bian, Junsong & Lai, Kin Keung & Hua, Zhongsheng & Zhao, Xuan & Zhou, Guanghui, 2018. "Bertrand vs. Cournot competition in distribution channels with upstream collusion," International Journal of Production Economics, Elsevier, vol. 204(C), pages 278-289.
    3. Ray-Yun Chang & Yan-Shu Lin & Jin-Li Hu, 2015. "Mixed Competition and Patent Licensing," Australian Economic Papers, Wiley Blackwell, vol. 54(4), pages 229-249, December.
    4. Luciano Fanti & Marcella Scrimitore, 2019. "How to Compete? Cournot versus Bertrand in a Vertical Structure with an Integrated Input Supplier," Southern Economic Journal, John Wiley & Sons, vol. 85(3), pages 796-820, January.
    5. Luciano Fanti & Marcella Scrimitore, 2017. "How to compete? Cournot vs. Bertrand in a vertical structure with an integrated input supplier," Discussion Papers 2017/221, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    6. Nakamura, Yasuhiko, 2019. "Combining the endogenous choice of the timing of setting incentive parameters and the contents of strategic contracts in a managerial mixed duopoly," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 207-233.
    7. Yasuhiko Nakamura, 2017. "Choosing Price or Quantity? The Role of Delegation and Network Externalities in a Mixed Duopoly," Australian Economic Papers, Wiley Blackwell, vol. 56(2), pages 174-200, June.
    8. Ryo Hashizume & Tatsuhiko Nariu, 2020. "Price and quantity competition with network externalities: Endogenous choice of strategic variables," Manchester School, University of Manchester, vol. 88(6), pages 847-865, December.
    9. Yasuhiko Nakamura, 2015. "Endogenous Choice of Strategic Variables in an Asymmetric Duopoly with Respect to the Demand Functions that Firms Face," Manchester School, University of Manchester, vol. 83(5), pages 546-567, September.
    10. Nakamura, Yasuhiko, 2015. "Endogenous choice of strategic incentives in a mixed duopoly with a new managerial delegation contract for the public firm," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 262-277.
    11. Lee, DongJoon & Choi, Kangsik & Nariu, Tatsuhiko, 2016. "Endogenous Choice of Price or Quantity Contract with Upstream R&D Investment: Linear Pricing and Two-part Tariff Contract with Bargaining," MPRA Paper 72752, University Library of Munich, Germany.
    12. Kangsik Choi & Seonyoung Lim, 2023. "Input Price Discrimination in Endogenous Competition Mode," The Japanese Economic Review, Springer, vol. 74(2), pages 301-330, April.
    13. Ki‐Dong Lee & Sunghee Choi & Kangsik Choi, 2020. "Bertrand versus Cournot competition in a downstream mixed oligopoly with foreign ownership," Bulletin of Economic Research, Wiley Blackwell, vol. 72(2), pages 101-120, April.
    14. Kosuke Hirose & Toshihiro Matsumura, 2019. "Comparing welfare and profit in quantity and price competition within Stackelberg mixed duopolies," Journal of Economics, Springer, vol. 126(1), pages 75-93, January.
    15. Yasuhiko Nakamura, 2019. "Combining the Endogenous Choice of the Timing of Setting the Levels of Strategic Contracts and Their Contents in a Managerial Mixed Duopoly," Journal of Industry, Competition and Trade, Springer, vol. 19(2), pages 235-261, June.
    16. Rupayan Pal, "undated". "The Cournot-Bertrand profit differential: A Reversal result in network goods duopoly," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-014, Indira Gandhi Institute of Development Research, Mumbai, India.
    17. Hsiao-Chi Chen & Yunshyong Chow & Shi-Miin Liu, 2024. "Dynamics of Cournot and Bertrand Firms: Exploring Imitation and Replicator Processes," Dynamic Games and Applications, Springer, vol. 14(5), pages 1057-1092, November.
    18. Basak, Debasmita & Wang, Leonard F.S., 2019. "Cournot vs. Bertrand in mixed markets with R&D," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 265-271.
    19. Rupayan Pal, 2014. "Price and quantity competition in network goods duopoly: a reversal result," Economics Bulletin, AccessEcon, vol. 34(2), pages 1019-1027.
    20. Xu, Lili & Lee, Sang-Ho, 2024. "Endogenous competition with an integrated public utility firm under an output subsidy policy," Utilities Policy, Elsevier, vol. 87(C).

    More about this item

    Keywords

    competition strategy; outsourcing; intermediate market;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejtec:v:18:y:2018:i:2:p:20:n:16. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.