Coordinating Investment, Production, and Subcontracting
Management Science
Competition and Outsourcing with Scale Economies
Management Science
Negotiations and Exclusivity Contracts for Advertising
Marketing Science
A Principal-Agent Model for Product Specification and Production
Management Science
Outsourcing via Service Competition
Management Science
Advertising in a Distribution Channel
Marketing Science
Call Center Outsourcing Contract Analysis and Choice
Management Science
Call Center Outsourcing: Coordinating Staffing Level and Service Quality
Management Science
Contracting and Information Sharing Under Supply Chain Competition
Management Science
Call Center Outsourcing Contracts Under Information Asymmetry
Management Science
A Bargaining Framework in Supply Chains: The Assembly Problem
Management Science
Risk Ownership in Contract Manufacturing
Manufacturing & Service Operations Management
Management Science
The Benefits of Competitive Upward Channel Decentralization
Management Science
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The existing outsourcing literature has generally overlooked the cost differential and contract negotiations between manufacturers and suppliers (by assuming identical cost structures and adopting the Stackelberg framework). One fundamental question yet to be addressed is whether upstream suppliers' cost efficiency is always beneficial to downstream manufacturers in the presence of competition and negotiations. In other words, does low cost outsourcing always lead to a win--win outcome? To answer this question, we adopt a multiunit bilateral bargaining framework to investigate competing manufacturers' sourcing decisions. We analyze two supply chain structures: one-to-one channels, in which each manufacturer may outsource to an exclusive supplier; and one-to-two channels, in which each manufacturer may outsource to a common supplier. We show that, under both structures, low cost outsourcing may lead to a win--lose outcome in which the suppliers gain and the manufacturers lose. This happens because suppliers' cost advantage may backfire on competing manufacturers through two negative effects. First, a decrease of upstream cost weakens a manufacturer's bargaining position by reducing her disagreement payoff (i.e., her insourcing profit) because the competing manufacturer can obtain a low cost position through outsourcing. Second, in one-to-two channels, the common supplier's bargaining position is strengthened with a lower cost because his disagreement payoff increases (i.e., his profit from serving only one manufacturer increases). The endogeneity of disagreement payoffs in our model highlights the importance of modeling firm negotiations under competition. Moreover, we identify an interesting bargaining externality between competing manufacturers when they outsource to a common supplier. Because the supplier engages in two negotiations, his share of profit from the trade with one manufacturer affects the total surplus of the trade with the other manufacturer. Because of this externality, surprisingly, as a manufacturer's bargaining power decreases, her profit under outsourcing may increase and it may be more likely for her to outsource. This paper was accepted by Yossi Aviv, operations management.