Impact of a contract manufacturer's entry on two competing platforms' sourcing strategies

Abstract

Many platforms, including the likes of Google, Amazon, and Microsoft, are now no longer merely satisfied with providing services or software but are increasingly eager to shape the future landscape of hardware devices. However, contract manufacturers (CMs) who supply hardware devices to such platforms might also produce competing products. This potential competition could prompt these platforms to consider in-house production for their devices. Motivated by this practice, we investigate the sourcing strategies of two competing platforms in the presence of a CM's entry and further explore the interaction between entry and sourcing strategies in a platform supply chain. The platforms select between insourcing the device through in-house production and outsourcing it to the CM. We find that, without entry, the CM's large cost advantage in producing the device relative to the platform induces the platform to choose the outsourcing strategy. In contrast, under entry, the equilibrium sourcing structures hinge upon the extent of the production cost difference between the platform and the CM in producing the device, as well as the degree of the high-efficiency platform's advantage in research and development efficiency over the low-efficiency platform in designing the platform. Particularly, when the CM enters through the platform with low efficiency, the asymmetric sourcing structure in which only the low-efficiency platform outsources is not an equilibrium, whereas the other sourcing structures may exist in equilibrium. Furthermore, in asymmetric sourcing structures, the large production cost difference prevents the CM from entering the market and, more intriguingly, the CM prefers the platforms to adopt the insourcing strategy to gain favourable market entry if the cost difference in producing the device is small. Several extensions are studied to obtain additional insights and demonstrate the robustness of the main findings from the baseline model.