STRATEGIC OUTSOURCING DECISIONS OF NEW ENTRANT AND COMPETING INCUMBENT MANUFACTURER IN A SUPPLY CHAIN WITH COMMON SUPPLIER

Abstract

We characterize outsourcing strategies and their interaction between the incumbent manufacturer and the new entrant in a supply chain with the common supplier. The incumbent manufacturer and the supplier can provide the critical components to the entrant, and we will investigate how the incumbent manufacturer competes with the new entrant and whether the common supplier can benefit from the new outsourcing. We find the incumbent benefits from the new entrant's outsourcing to a monopoly supplier, and it is rational and more profitable for the incumbent to cooperate with the new one. Then, we analyze the supplier's response to the incumbent's strategic behavior and reveal that a rational supplier would offer the incumbent a more favorable price. Counter-intuitively, the supplier may benefit if the entrant possesses more bargaining power.