Using brand equity to counter outsourcing opportunism: A game theoretic approach

Outsourcing has long been touted as an avenue for companies to divest their non-core processes for cost and efficiency gains. However, outsourcing has since become so sophisticated that some companies are even outsourcing core functions such as engineering, marketing, and R&D and as a consequence, could be unknowingly nurturing its outsourcing partners as future competitors. Through formal game theoretic analysis, we show that in addition to learning, outsourcing firms could also make use of brand equity to safeguard themselves from the threat of potential market entry by their outsourcing suppliers when the outsourced component is a core competence, particularly when the rate of learning is at best moderate. In addition, we show that it may be optimal for outsourcing firms to adopt a make-and-buy strategy.