Title: Optimal contract design for outsourcing: pricing and quality decisions

Authors: Xiaowei Zhu, Samar K. Mukhopadhyay

Addresses: College of Business and Public Affairs, West Chester University of Pennsylvania, West Chester, PA 19383, USA. ' Graduate School of Business, Sungkyunkwan University, 53 Myungryun-dong 3-ga, Jongro-gu, Seoul 110-745, Korea

Abstract: Outsourcing is currently being used as an important strategy for many companies in the USA to focus on the core competency, reduce cost and increase profit. We consider a company (buyer) outsourcing a part of her service. One of the main concerns of outsourcing is the quality of service. We use a game theoretic model to design optimal contracts between the buyer and the service supplier under the full information and the asymmetric information. In both cases, we find the optimum outsourcing quantity, quality, price and a cut-off point that will make the contract unsuitable.

Keywords: contract design; game theory; outsourcing; quality; revenue management; pricing; service suppliers.

DOI: 10.1504/IJRM.2009.024164

International Journal of Revenue Management, 2009 Vol.3 No.2, pp.197 - 217

Published online: 27 Mar 2009 *

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