Service outsourcing under co-opetition and information asymmetry

Abstract

Co-opetition refers to the phenomenon that firms simultaneously cooperate and compete in order to maximize their profits. This paper studies the contracting for an outsourcing supply chain (a user company vs. a service provider) in the presence of co-opetition and information asymmetry. The user company outsources part of his service capacity at a discount price to the service provider for sale. The service provider charges a commission for doing outsourcing work and competes with the user company for the service capacity to satisfy their respective demands. We solve for the service provider’s optimal commission decision and the user company’s optimal outsourcing decisions (outsourcing volume and price discount) when the user company has private information about his service capacity. Specifically, we highlight the following observations. For the service provider, a menu of two-part tariffs that consist of a fixed commission and a per-volume commission can reveal the true type of the user company’s capacity; the user company’s optimal outsourcing proportion is quasi-convex and the optimal price discount is non-decreasing in his capacity volume, which is counterintuitive.

Keywords:

• service outsourcing
• service provider
• co-opetition
• information asymmetry

Acknowledgments

This research was supported by the National Natural Science Foundation of China under Grant Nos. 71371176, 71571115 and 71671108. The corresponding author Yanhong Sun also thanks the "Chenhuang Plan" support from Shanghai Municipal Education Commission in China (No. 15CG47).