In many industries, firms consider the option of outsourcing an important service process associated with the goods or services they bring to the market. Often, competing firms outsource this service process to one or more common service suppliers. When they outsource to a common service provider, this gives rise to a service supply chain. We develop analytical models to characterize the benefits and disadvantages of outsourcing in service industries in which the retailers compete with each other in terms of the price they charge and/or the waiting time expectations and standards which they adopt and sometimes advertise. We show that the benefits of outsourcing are affected by the supplier's ability to exploit the benefits of service pooling as well as differences in the cost rates themselves.

Gad Allon and Awi Federgruen
Working Paper
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Allon, Gad and Awi Federgruen
. Outsourcing service processes to a common service provider under price and time competition. December 01, 2008.