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

This paper presents a make-or-buy (M–B) model in which a firm (say Firm 1) may produce in-house, or outsource a product to the unique vendor, the monopolist in the outsourcing market. Demand for the finished product is stochastic and price-sensitive, and Firm 1's information forecast about the base market demand and corresponding precision are known when the M–B decision is faced. Firm 1 is risk-neutral and owns a constant-return-to-scale technology, while the vendor is risk-averse and enjoys the advantage of scope economies. A traditional solution is provided under perfect information.