Abstract
This paper investigates a vertical supply chain consisting of an original equipment manufacturer (OEM) and a contract manufacturer, who performs production function for the OEM. The contract manufacturer decides whether to encroach the OEM’s market and build her own private brand. The advertising effort of two members is considered. The results show that the contract manufacturer’s encroachment decreases the profit margin of the OEM and increases the wholesale price. When the substitution effect is sufficiently small, the introduction of the private brand slightly harms the benefit of the OEM. However, when the substitution effect is sufficiently large, the introduction of the private brand can significantly benefit the OEM which is counterintuitive. The introduction of the private brand is beneficial for the contract manufacturer and the whole supply chain. The management insight is that: For the contract manufacturer, it is better to introduce a highly substitutable brand with the OEM, which can significantly benefit both the contract manufacturer and the OEM.
Highlights
It is common that original equipment manufacturers (OEMs) outsource production to contract manufacturers (CMs) (Niu et al, 2015; Chen et al, 2012; Kaya, 2011; Zhang, 2011)
When the substitution effect is sufficiently small, the introduction of the private brand slightly harms the benefit of the OEM
This paper studies a supply chain consisting of a contract manufacturer and an OEM
Summary
It is common that original equipment manufacturers (OEMs) outsource production to contract manufacturers (CMs) (Niu et al, 2015; Chen et al, 2012; Kaya, 2011; Zhang, 2011). Https://www.biyao.com is a newly built e-commerce platform in China and has developed fast in recent years This platform provides the opportunities for the contract manufacturer to build their own brands. The OEM’s brands are usually well-known in the market This tactic will attract the attention of consumers for the private brand. The advertising effort of the contract manufacturer’s private brand will positively impact both itself and the OEM. 2) What are the effects of the contract manufacturer’s encroachment on the OEM, contract manufacturer and the whole supply chain?. When the substitution effect is sufficiently large, the introduction of the private brand can significantly benefit the OEM which is counterintuitive. It is better to introduce a highly substitutable brand with the OEM, which can significantly benefit both the contract manufacturer and the OEM
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