OEM’s sales formats under e-commerce platform’s private-label brand outsourcing strategies

Abstract

In recent years, numerous e-commerce platforms have introduced private-label brands to compete with national brands of original equipment manufacturers (OEMs). However, the existing literature rarely concerns the production outsourcing strategy for the platform’s private brands (i.e., outsourcing to the same contract manufacturer as that of the OEM or a different contract manufacturer) and its impact on the OEM, although the outsourcing strategy is critical to the success of the private brands. In this paper, we develop a game-theoretical model to investigate the OEM’s sales format selection under the outsourcing strategy of the platform and the strategic interplay between them. We show that the adoption of the common (different) contract manufacturer encourages the OEM to choose the agency (reselling) format. This preference is affected by the acceptance of private brands—as the private-brand acceptance increases, the OEM prefers to adopt the agency (reselling) format. Furthermore, we find that at equilibrium, three strategy combinations emerge. Interestingly, to cope with the outsourcing strategy, the OEM may use the reselling format instead of agency selling when the referral fee is low. Moreover, the extension section examines the impacts of the game sequences and production cost differentiation. The platform and OEM may encounter a prisoner’s dilemma when they set their strategies simultaneously. Besides, the cost differentiation is an important factor driving the platform’s outsourcing strategy choice.