Contract Manufacturer’s Encroachment Strategy Considering Advertising Effort

摘要

This paper investigates a vertical supply chain consisting of an original equipment manufacturer (OEM) and a contract manufacturer, who performs production function for the OEM. The contract manufacturer decides whether to encroach the OEM’s market and build her own private brand. The advertising effort of two members is considered. The results show that the contract manufacturer’s encroachment decreases the profit margin of the OEM and increases the wholesale price. When the substitution effect is sufficiently small, the introduction of the private brand slightly harms the benefit of the OEM. However, when the substitution effect is sufficiently large, the introduction of the private brand can significantly benefit the OEM which is counterintuitive. The introduction of the private brand is beneficial for the contract manufacturer and the whole supply chain. The management insight is that: For the contract manufacturer, it is better to introduce a highly substitutable brand with the OEM, which can significantly benefit both the contract manufacturer and the OEM.