Outsourcing Competition and Information Sharing with Asymmetrically Informed Suppliers

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.