LAUSR

This paper uses two versions of a vertical product differentiation model with price competition to investigate how strategic behaviour between rivalrous firms will influence which organizational production mode each firm adopts, vertical integration or outsourcing. We show that not only a symmetric configuration, where both highand low-quality firms outsource, but an asymmetric configuration, where the highquality firm produces in-house while the low-quality firm outsources, is accepted as a subgame perfect equilibrium outcome. Furthermore, the implications of these results are explored with a discussion about a recent business slump in Japanese electronics enterprises in the flat panel television industry. (99 words)