Production outsourcing decision in the presence of consumer’s preference uncertainty

Abstract

We investigate upstream coopetition and competition in a supply chain in the context of a high-quality brand manufacturer’s strategy on upstream outsourcing and e-commerce platform’s strategy on downstream information disclosure. The high-quality brand manufacturer outsources production and sells through an e-commerce platform, where a low-quality manufacturer also sells. The high-quality manufacturer may outsource to a third manufacturer who produces only the brand manufacturer’s high-quality product, maintaining a competition relationship with the low-quality manufacturer (competition strategy). The high-quality brand manufacturer also has the option to outsource to the low-quality manufacturer, entering into a coopetition relationship (coopetition strategy). The consumers have knowledge about the quality of the two products, but they are uncertain about their quality preference. That is, they are not sure which of the two quality-differentiated products available in the market will meet their own needs. Their uncertainty can be eliminated by the e-commerce platform’s disclosure of preference-revealing information. We find that the brand manufacturer prefers the coopetition strategy when the ratio of the two products’ cost-quality efficiencies is very low or moderate. The e-commerce platform has an incentive to disclose preference-revealing information when the ratio of the two products’ cost-quality efficiencies is moderate or high. We show the optimal strategies of the supply chain with the brand manufacturer’s outsourcing strategy and the platform’s information disclosure strategy, and we also extend the discussion to the impacts of several related issues.