Outsourcing Competition and Information Sharing with Asymmetrically Informed Suppliers

Forthcoming at Production and Operations Management, 2013

24 Pages Posted: 5 Apr 2011 Last revised: 10 Nov 2013

See all articles by Xia Zhao

Xia Zhao

University of North Carolina at Greensboro - Information Systems & Supply Chain Management

Ling Xue

Georgia State University

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School

Date Written: March 11, 2013

Abstract

This paper studies an outsourcing problem where two service providers (suppliers) compete for the service contract from a client. The suppliers face uncertain cost for providing the service because they do not have perfect information about the client's type. The suppliers receive differential private signals about the client type and thus compete under asymmetric information. We first characterize the equilibrium of the supplier competition. Then we investigate two of the client's information sharing decisions. The first decision is about whether the client should help the less-informed supplier get better information. It is shown that less information asymmetry may dampen the supplier competition. Therefore, the client does not necessarily have the incentive to reduce information asymmetry between the suppliers. We characterize the conditions under which leveling the informational ground is beneficial to the client. The second decision is about how much information the client should share with both suppliers so as to improve the quality of their signals. Under the presence of information asymmetry (e.g., when the suppliers have different learning abilities), sharing more information may enhance the advantage of one supplier over the other. As a result, the client's profit may decrease in the amount of information shared with the suppliers. The findings from this paper provide useful managerial implications on information management for outsourcing firms.

Keywords: service outsourcing, asymmetric information, common value auction, information sharing

Suggested Citation

Zhao, Xia and Xue, Ling and Zhang, Fuqiang, Outsourcing Competition and Information Sharing with Asymmetrically Informed Suppliers (March 11, 2013). Forthcoming at Production and Operations Management, 2013. Available at SSRN: https://ssrn.com/abstract=1801622 or http://dx.doi.org/10.2139/ssrn.1801622

Xia Zhao

University of North Carolina at Greensboro - Information Systems & Supply Chain Management ( email )

401 Bryan Building
Greensboro, NC 27402-6179
United States

Ling Xue

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Fuqiang Zhang (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.olin.wustl.edu/faculty/zhang/

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