 Vertical governance change and product differentiation under decreasing component costsBen Vermeulen, K.J.M. Huisman and A.G. de Kok Journal of Economic Dynamics and Control, 2015, vol. 57, issue C, 65-76 Abstract: In deciding on whether and when to outsource component production, firms should consider the trade-off between total production costs and the ability to horizontally differentiate products. We study the outsourcing decision in a duopoly under decreasing but uncertain market rates for components, given that outsourcing increases the substitutability of the final products. We find that there is at least one firm that eventually outsources component production because it cannot differentiate its product enough by in-house production to justify the (eventually) higher costs. The follower outsources at a lower market rate or may even remain vertically integrated. The follower thus incurs the (eventually) much higher in-house component costs longer, while the low substitutability is enjoyed by both firms. Under endogenous roles, firms thus engage in a preemption game to be the first to outsource. We also find that firms generally outsource at lower market rates if uncertainty is higher, but seek to preempt at remarkably higher market rates if substitutability remains low. JEL-codes: C73 D23 D81 L14 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:57:y:2015:i:c:p:65-76 DOI: 10.1016/j.jedc.2015.05.010 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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