Coopetition Strategy and Pricing Timing in an Outsourcing Supply Chain With Uncertain Operation Risks

Abstract

At present, an increasing number of original equipment manufacturers (OEMs) often outsource their product manufacturing to original design manufacturers (ODMs) that also produce their own-brand products and then become powerful competitors of the OEMs. Following this, our work explores whether two such direct competitors should still cooperate in their original contract manufacturing and how coopetition decisions affect their preferred pricing timing when they enter the downstream product market. We establish a multistage model including an OEM and its competitive ODM and derive some managerial insights. First, we find that the OEM and the competitive ODM prefer to cooperate in contract manufacturing as the OEM is more risk loving, the competitive ODM is more risk averse and the wholesale price is relatively small. Second, we illustrate that the two parties are more likely to achieve an agreement on cooperation in the ODM-pricing-early game relative to the two other games. Third, we show that when the OEM is sufficiently risk averse, the two parties' preferences for pricing timing remain the same regardless of whether they cooperate in contract manufacturing. However, once the OEM becomes risk loving, it will be less willing to move later as the wholesale price increases, which is different from classical Bertrand competition.