The coopetition effect of learning-by-doing in outsourcing

Abstract

Learning-by-doing is a prevailing phenomenon in which a firm's production cost decreases in its production quantity. We build a two-period model to investigate the coopetition effect of learning-by-doing in a supply chain with two competing original equipment manufacturers (OEMs) outsourcing to a common contract manufacturer (CM) whose production exhibits the learning-by-doing effect. Excluding the learning cooperation between OEMs, the learning-by-doing intensifies the price competition to such an extent that OEMs' two-period overall profits could be lower than the case of no learning. Outsourcing to a common CM brings OEMs higher learning benefits which dominate the negative effect of intensified competition. OEMs' two-period overall profits are always higher in this case. Interestingly, increasing the product substitution rate has two opposite effects on the OEMs' overall profits. Under certain condition, OEMs' profits might be increasing in the substitution rate since the positive cooperation effect dominates the negative competition effect. With coopetition effect of learning-by-doing, we show that OEMs' other simpler pricing strategies, such as myopic pricing and uniform pricing, may outperform the strategic differential pricing strategy. Moreover, when the two OEMs are significantly differentiated in market base, the larger OEM may prefer not outsourcing to a common CM due to the coopetition concern. Finally, we find that asymmetric production learning and CM's pricing power have important impacts on OEMs' decisions and profits.