Two Subcontracting Systems and Competitive Advantage

This chapter compares two subcontracting systems in a three-stage duopoly model. An American-typed assembler such as GM generally produces an input internally, while a Japanese-typed assembler such as Toyota purchases it from its affiliated (Keiretsu) supplier. The American-typed assembler has the advantage of investment incentive, but has the disadvantage of the input price management. On the other hand, the Japanese-typed assembler has the advantage of the input price adjustment, but has the disadvantage of providing investment incentive for the affiliated supplier. Our results are as follows: if the Japanese assembler can support its affiliated supplier prior to purchasing the input, the support enables the assembler to purchase the input at a low price. As a result, the assembler has a competitive advantage in the final product market.