Make-or-buy in the presence of uncertainty and private information |
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| Institution: | 1. Durham University Business School, Durham, United Kingdom\n;2. School of Business, Institute for International Integration Studies (IIIS), The Sutherland Centre, Level 6, Arts Building, Trinity College Dublin 2, Ireland\n;3. York St. John''s Business School, York St John University, Lord Mayor''s Walk, York YO31 7EX, United Kingdom\n;1. Foster School of Business, University of Washington, United States;2. Kogod School of Business, American University, United States;1. College of Business Administration, Hankuk University of Foreign Studies, 270 Imun-dong Dongdaemun-gu, Seoul 130-791, Republic of Korea;2. College of Business Administration, Chung-Ang University, 221 Heuseok-dong Dongjak-gu, Seoul 156-756, Republic of Korea;1. Department of Finance, Ling Tung University of Science and Technology, Taiwan;2. Department of Finance, National Yunlin University of Science and Technology, Taiwan |
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| Abstract: | In textbook discussions of the make-or-buy problem, outsourcing is often justified on technological grounds. Suppliers may have better equipment, more capacity, or benefit from economies of scale. This teaching note demonstrates that even when technological issues are absent, outsourcing can be preferred. The benefit to outsourcing arises because the price set by a self-interested supplier can convey information to a buyer. Information conveyed by a supplier allows the firm to better tailor its production to the circumstance. The case also provides students an opportunity to apply basic concepts from economics, statistics, and mathematics to a common managerial accounting problem. |
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