A study of production outsourcing strategies of dual oligopoly manufacturers based on quality investments

Abstract

Introduction: Self-production and outsourcing are two important production strategies for manufacturers, and the production capacity and investment capacity of manufacturers and suppliers play a decisive role in the quality of products. This study aims to analyze the manufacturer’s best production strategy and the drivers of outsourcing in the context of quality. Methods: This study constructs production outsourcing game models for duopoly manufacturers, examines the trade-offs between self-production and outsourcing when suppliers have the ability to invest in quality, explores the requirements and implications of outsourcing and compares the differences between “one-to-one” and “one-to-many” outsourcing structures. Results: First, outsourcing can reduce the level of product quality and that a necessary condition for manufacturers’ outsourcing is a strong advantage in the supplier’s production costs. Second, duopoly manufacturers may face a prisoner’s dilemma as a result of outsourcing. Finally, compared to two independent suppliers, outsourcing to a common supplier can increase the level of product quality by exploiting the centralization effect and increase the firm’s profits when the market’s competition intensity is low. Conclusion: First, the production strategy balance of duopoly manufacturers is closely related to the outsourcing structure, production efficiency and investment efficiency. Second, duopoly manufacturers choose outsourcing may fall into the prisoner’s dilemma, and outsourcing has the risk of quality reduction.