Outsourcing or not? OEM's entry decision considering brand spillover effect

Abstract

PurposeIn this paper, the authors study the entry and outsourcing strategies of manufacturer while considering the brand spillover effect resulting from outsourcing. The supply chain comprises two manufacturers: one being the entrant with a strong brand, and the other as the incumbent with a weak brand. The entrant decides whether and how to enter the market.Design/methodology/approachStackelberg game is applied to study the optimal strategies for the manufacturers. This paper conducts a comparative analysis on four situations, yielding conclusions and managerial insights.FindingsThe results show that, for the entrant, there is no need to worry about the brand spillover effect in the outsourcing process, which is very interesting and counterintuitive. To get further, the authors find the reason: The spillover effect causes the entrant’s equilibrium retail price to grow faster than the wholesale price. They also prove that a stronger brand effect empowers the entrant to challenge industry barriers, while the impact of the brand spillover effect is the opposite. For the incumbent who acts as the weak party in this issue, it is demonstrated that the optimal choice is to continue selling when facing the encroachment and outsourcing call from the entrant.Originality/valueDiffering from previous studies, the authors notice the brand spillover effect caused by outsourcing when studying company’s entry strategy. They further divide the brand effect into two parts, one of which does not exhibit a spillover.