Co-opetition or decentralization? A study of manufacturers’ sourcing and distribution strategies

Abstract

This study aims to explore the impacts of manufacturers’ downstream distribution channels on upstream sourcing strategy and of the business relationship between manufacturers resulting from upstream sourcing transactions on downstream distribution strategy, through investigating the interplay of co-opetition and decentralization. We consider a framework with two manufacturers producing substitutable products. In the upstream component market, one manufacturer needs to source a key component from either a third-party supplier or its competing manufacturer. In the downstream consumer market, each manufacturer sells the end product through either an integrated or a decentralized distribution channel. The two channels engage in a price competition. For a given downstream distribution strategy, we find that even at a higher component price, the manufacturer who purchases the component may have incentive to source from its competitor that has an integrated channel, while having no incentive to choose a decentralized competitor. A key driver behind this contrast is that co-opetition can be substituted by a decentralized channel used by the competitor, which enables the manufacturer who purchases the component to mitigate price competition more efficiently. For a given upstream sourcing strategy, in contrast to the literature which shows that manufacturers generally prefer downstream decentralization at high competition intensity, we find that integration is always preferred by manufacturers who engage in supplier–buyer cooperation. A key underlying driver is that co-opetition helps the manufacturer who sells the component mitigate price competition more efficiently than decentralization. We also extend our analysis by investigating manufacturers’ decisions on both sourcing and distribution strategies.