Nash Bargaining and Outsourcing in a Duopoly Market

Abstract

In this paper, we clarify the impact of Nash bargaining between manufacturers and an input supplier on manufacturer outsourcing decisions. At a subgame perfect equilibrium, the manufacturers select in-house production, and no outsourcing equilibrium exists. In the intra-industry outsourcing literature, Sinha (2016) shows that manufacturers select in-house production in response to the existence of fixed costs. In contrast, we clarified that Nash bargaining leads to in-house production equilibrium even when the cost function is not associated with fixed costs.