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

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.