On the advantage of quantity leadership when outsourcing production to a competitive contract manufacturer

Yulan Wang, Baozhuang Niu, Pengfei Guo

Research output: Journal article publicationJournal articleAcademic researchpeer-review

91 Citations (Scopus)

Abstract

This study investigates a supply chain comprising an original equipment manufacturer (OEM) and a contract manufacturer (CM), in which the CM acts as both upstream partner and downstream competitor to the OEM. The two parties can engage in one of three Cournot competition games: a simultaneous game, a sequential game with the OEM as the Stackelberg leader, and a sequential game with the CM as the Stackelberg leader. On the basis of these three basic games, this study investigates the two parties' Stackelberg leadership/followership decisions. When the outsourcing quantity and wholesale price are exogenously given, either party may prefer Stackelberg leadership or followership. For example, when the wholesale price or the proportion of production outsourced to the CM is lower than a threshold value, both parties prefer Stackelberg leadership and, consequently, play a simultaneous game in the consumer market. When the outsourcing quantity and wholesale price are decision variables, the competitive CM sets a wholesale price sufficiently low to allow both parties to coexist in the market, and the OEM outsources its entire production to this CM. This study also examines the impact of the supply chain parties' bargaining power on contract outcomes by considering a wholesale price that is determined via the generalized Nash bargaining scheme, finding a Stackelberg equilibrium to be sustained when the CM's degree of bargaining power is great and the non-competitive CM's wholesale price is high.
Original languageEnglish
Pages (from-to)104-119
Number of pages16
JournalProduction and Operations Management
Volume22
Issue number1
DOIs
Publication statusPublished - 1 Jan 2013

Keywords

  • competitive CM
  • contract manufacturing
  • Cournot competition
  • outsourcing
  • quantity leadership

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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