Interplay Between Parallel Importation and Outsourcing in Global Supply Chains: A Game Theoretical Analysis

Parallel importation (the unauthorized cross-border resale of genuine products) and outsourcing (the delegation of manufacturing activities to external contract manufacturers) are common yet insufficiently explored phenomena in global supply chains. Using a game-theoretic model of a multinational firm (MNF) and a contract manufacturer (CM), we analyze how parallel importation and outsourcing interact. We find that higher in-house production costs borne by the MNF reduce the risk of parallel importation. While parallel imports diminish total demand under in-house production, outsourcing counteracts this loss as the CM strategically lowers wholesale prices to stabilize market share. Although parallel imports consistently erode the CM's profit and overall supply-chain efficiency, they can counter-intuitively benefit the MNF by inducing wholesale-price concessions. This explains why the MNF may retain in-house production despite higher costs to deter parallel imports. Robustness is maintained under various demand and supply conditions, including consumer bias for or against parallel imports, stochastic gray-market entry, and the presence of positive contract-manufacturing costs.