The Role of Brand Image and Product Characteristics on Firms’ Entry and OEM Decisions

Abstract

This paper shows that differences in brand image and product quality (horizontal and vertical differentiation) can govern the market-entry decisions of firms facing a market already served by an incumbent. The entrant might sell under its own brand, become a supplier to the incumbent (called an OEM arrangement), or both. Findings reveal that when firms are vertically but not horizontally differentiated, the entrant cannot profit from entering the market on its own, but firms can profit from OEM arrangements. When firms are both vertically and horizontally differentiated, the entrant profits by simultaneously entering the market and establishing an OEM arrangement with the incumbent. This is an interesting outcome because in competitive scenarios in which firms compete for consumers, the entrant will effectively sell its own product to the competitor. Furthermore, in those competitive scenarios, both buyer and seller increase profits by agreeing on a high wholesale price. When firms have the capability of producing all possible qualities of the products on their own, OEM relationships between firms can still happen in equilibrium. In this case, the most interesting result is the fact that, under certain conditions, firms may select to produce goods of different qualities and become suppliers to each other, despite the fact that they will end up selling the same product qualities to consumers. The reason for this outcome is that this dual buyer-seller arrangement causes a strategic effect that reduces the firms' aggressiveness when competing for consumers.

Commitment to Environmental and Climate Change Sustainability under Competition

“…Consumers have different taste preferences, e.g., heterogeneous brand preference [26,27], which are distributed uniformly on a Hotelling line of unit length. Dating back to the seminal work by Hotelling [28], the Hotelling model has been widely utilized in industrial economics to model a duopoly industry of two competing firms that sell to heterogeneous consumers (See Martin [29] and Tirole [30] for a thorough review of the Hotelling models and extensions).…”

“…Dating back to the seminal work by Hotelling [28], the Hotelling model has been widely utilized in industrial economics to model a duopoly industry of two competing firms that sell to heterogeneous consumers (See Martin [29] and Tirole [30] for a thorough review of the Hotelling models and extensions). For analytical simplicity, we normalize the length of the Hotelling line to one, following Desai [31], Caldieraro [26] and Liu and Tyagi [32]. We assume that firms are located at the extreme points of the line; firm 1 is located at x = 0 and firm 2 is located at x = 1.…”

“…Each consumer incurs a cost dx, where d denotes a transportation cost parameter, representing the strength of consumers' taste preferences on its utility [31]. Consumer taste preference has been considered important in the studies on competition [26,31] because it indicates the extent to which consumer may choose the product that fits less to the ideal preference. More specifically, stronger consumer taste preference implies that the decisions of competing firms, i.e., price and sustainability investment in our study, have relatively fewer impacts on consumers' buying decision, thus it is difficult to induce customers that are close to the competitor.…”

Capacity Sharing Between Competitors

“…It is only after stockout arises that they approach each other to determine the transfer price for capacity sharing. 7 Some discussions on the model setup are warranted. First, we assume that the firms' decisions 5 If we assume that one of the firms (e.g., the capacity lender) has a higher probability to be the offer maker, the firms would be asymmetric under ex post contracting, but still symmetric under ex ante contracting.…”

“…They show that cross-firm purchases can modify the sequence of the firms' production decisions into a Stackelberg setting (Chen 2010). Caldieraro (2016) finds that strategic production outcourcing can occur between an entrant and an incumbent selling differentiated products. He also shows that the firms may prefer high transfer prices to mitigate price competition.…”