Service Competition for IT Service Outsourcing

With IT outsourcing being a widely adopted business strategy, the objective of this study is to identify the status of competition as a mechanism for the client to induce service quality from the service providers. This paper brings up a game model of service level competition between two vendors with different marginal costs in a two-period framework. We find that there is no pure strategy in the vendors' service levels and derive the explicit form of the mixed- strategy equilibrium for the vendors. Our results show that the vendor with higher marginal cost normally would provide a minimum service level, which is required by the client, and sometimes randomize its service level, whereas the vendor with lower marginal cost is likely to provide a service level higher than the minimum service level, and is more likely to obtain a larger portion of the outsourced IT services.