Demand uncertainty, quantity leadership, and competition from upstream CM

Abstract

We study the impact of demand uncertainty on the quantity leadership/followership choice of an original equipment manufacturer (OEM) and his competitive contract manufacturer (CM), who produces for the OEM and sells self-branded products in the downstream market. We assume demand is uncertain at stage 1, but can be fully disclosed at stage 2. The OEM and the competitive CM can engage in one of three basic quantity competition games: a simultaneous game, a sequential game with the OEM as the quantity leader, and a sequential game with the competitive CM as the quantity leader. The two parties make their quantity leadership/followership choices based on the trade-off formed by the first-mover advantage and the information value when they decide to wait. We show that the OEM places all his production orders to the competitive CM. We also show that a simultaneous game arises that they both prefer followership when the degree of demand uncertainty is high. Interestingly, we find that their preferences over quantity leadership are influenced by the competition intensity degree when demand uncertainty varies in a moderate range. The OEM chooses to be a leader and the competitive CM chooses to be a follower when the competition is sufficiently intense. Otherwise, they make the opposite decisions, that is, the OEM is the follower while the competitive CM is the leader.