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Using brand equity to counter outsourcing opportunism: A game theoretic approach

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Abstract

Outsourcing has long been touted as an avenue for companies to divest their non-core processes for cost and efficiency gains. However, outsourcing has since become so sophisticated that some companies are even outsourcing core functions such as engineering, marketing, and R&D and as a consequence, could be unknowingly nurturing its outsourcing partners as future competitors. Through formal game theoretic analysis, we show that in addition to learning, outsourcing firms could also make use of brand equity to safeguard themselves from the threat of potential market entry by their outsourcing suppliers when the outsourced component is a core competence, particularly when the rate of learning is at best moderate. In addition, we show that it may be optimal for outsourcing firms to adopt a make-and-buy strategy.

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Notes

  1. We agree with an anonymous reviewer that the method used for price determination in the second period is an ad hoc one, and is different from the formal approach whereby the bargaining parties’ payoffs are explicitly specified and subsequently used to determine the outsourcing price. Hence the bargaining process used in our model could at best be an approximation of a formal bargaining process and our model results should be read with this limitation in mind.

  2. We acknowledge that when S does not enter the same market as B in Period 2, putting P 2S as infinity does not result in the demand function of B when S does not enter the market. This is a limitation of our demand model.

  3. All technical proofs are available from the authors.

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Authors and Affiliations

  1. Marketing Department, NUS Business School, National University of Singapore, BIZ 1 Building #04-19, 1 Business Link, Singapore, 117592, Singapore

    Wei Shi Lim & Soo-Jiuan Tan

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  1. Wei Shi Lim
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  2. Soo-Jiuan Tan
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Correspondence to Soo-Jiuan Tan.

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Lim, W.S., Tan, SJ. Using brand equity to counter outsourcing opportunism: A game theoretic approach. Mark Lett 20, 369–383 (2009). https://doi.org/10.1007/s11002-009-9071-8

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  • DOI: https://doi.org/10.1007/s11002-009-9071-8

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