Original equipment manufacturing contract and three-way bargaining: Cooperation, control, and the opportunism within

Abstract

This chapter discusses the original equipment manufacturer (OEM), a model of large-scale industrial production that is popular today in many sectors of industry, especially in the information technology industry. An OEM's contractual setting usually involves a three-party negotiation, which includes a product design company/brand owner, an OEM, and a component supplier. The underlying logic of the OEM model is the delegation of manufacturing tasks to different players with different skill sets or specialties for a better allocation of resources. However, this contractual design also entails much complexity in its coordination, as modern manufacturing often has dozens or hundreds of units or steps before a final product is complete. The author further discusses the phenomenon of the "technical service charge" contract, which is a side agreement between an OEM and a component supplier that allows the OEM to receive a payment or rebate from the component supplier even though there is no real exchange of goods or services involved. The technical service charge contract exemplifies the commercial opportunism and dynamics of adjustment at work in the multi-party supply chains of modern-day manufacturing. Examining this contractual design sheds light on how contracting parties extract benefit from the arrangement.