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Strategic outsourcing and quality choice: Is a vertical integration model sustainable?

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  • Yoshinari Miyamoto

Abstract

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.

Suggested Citation

  • Yoshinari Miyamoto, 2021. "Strategic outsourcing and quality choice: Is a vertical integration model sustainable?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(5), pages 1332-1351, July.
    • Handle: RePEc:wly:mgtdec:v:42:y:2021:i:5:p:1332-1351
    DOI: 10.1002/mde.3312
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    References listed on IDEAS

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