Price and service competition between an encroaching contract manufacturer and an original equipment manufacturer

Abstract

This paper studies the Nash equilibrium in prices and service levels that arise from competition between an Original Equipment Manufacturer (OEM) and an encroaching Contract Manufacturer (CM). We considered a supply chain model in which an OEM procures products from a CM that also sells self-branded products. The CM and OEM compete in the end market by selling partially substitutable products. The dual role taken by the CM as an upstream manufacturer as well as downstream competitor leads to a complicated relationship with the OEM. We examine how OEM and CM pricing and service decisions are influenced by a variety of market circumstances, including market size, investment efficiency, and end-market competition intensity. The threshold for competition intensities and the ensuing shifts in a CM’s strategy depends on a complex interplay of market factors. Numerical results are also provided.