Scope economies, market information, and make-or-buy decision under asymmetric information

Under asymmetric information, we demonstrate that when outsourcing is realized, both parties' expected profits increase with (Firm 1's) forecast accuracy only if the forecasted market demand is higher than the base demand (i.e., “good” news). Outsourcing strictly dominates in-house production if the yield of the vendor's production input is sufficiently low or its economies of scope are remarkably attractive. Furthermore, it is optimal for Firm 1 to hide information at first and decide whether or not to share information only after the vendor's supply price is announced. However, the vendor's profit is constrained by the trade-off between the coordination effort for impelling Firm 1 to share information and the advantages of its monopoly on outsourcing market, low production costs, as well as scope economies.