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

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.