Hubert Pun

Channel Structure Design for Complementary Products under a Co‐Opetitive Environment

In the high-tech industry, firms can be partners in one respect (e.g., resellers) and competitors in another. In this article, we investigate the channel structure problem for two firms-each selling competing products in two complementary markets—who are deciding whether to sell their products to customers directly or distribute one of them through a competitor. The customers are heterogeneous and both firms have products that are horizontally differentiated. When selling products directly, the firm can coordinate the prices of the two complementary products and avoid the inefficiency of double marginalization. However, selling (indirectly) through the competing manufacturer can mitigate competition because the competitor shares the profit of both competing products and therefore does not price its own products aggressively. One might expect that when the externality across the markets is strong, firms would prefer to sell both products directly (rather than through the competitor) in order to take advantage of the complementarity between markets and eliminate the inefficiency of double marginalization. Interestingly, we find that even though the first mover chooses to sell both products directly, the second mover forsakes the opportunity to coordinate the prices of its products and instead opts to distribute one of the products through the first mover.

Controlling a supplier’s subcontracting decisions through contractual enforcement or economic incentives

Suppliers often subcontract part of their workload to other suppliers, and manufacturers might suffer severe consequences if they do not anticipate their suppliers’ incentives to subcontract. In this paper, we study the case where a manufacturer outsources two tasks to a top-tier supplier. The manufacturer must decide whether it should design a contract that enforces that the different tasks are completed by the appropriate suppliers, and when it is preferable to use economic incentives to manipulate the top-tier supplier’s subcontracting behaviour. We find that when the cost difference between suppliers of different tiers is small and the correlation between the risks associated with the two tasks is minimal, the manufacturer can benefit from designing a contract that ensures the preferred subcontracting behaviour, if the cost of enforcing such a contract is not too high. However, when such enforcement cost is substantial, the manufacturer might be better off manipulating the top-tier supplier’s economic incentives.

Outsourcing to suppliers with unknown capabilities

We investigate the make-buy decision of a manufacturer who does not know its potential suppliers’ capabilities. In order to mitigate the consequences of this limited knowledge, the manufacturer can either perform in-house or audit suppliers. An audit reveals the audited supplier’s capability such that the manufacturer can base the make-buy decision on the audit outcome; the manufacturer might also learn from the audit and update its beliefs about the capabilities of the unaudited suppliers. Interestingly, using a very general model we find that the manufacturer’s decision can be independent of both the number of available suppliers and of the mechanism it uses to update its beliefs after an audit. We illustrate our general model by considering a possible application, where a manufacturer is making the outsource-audit decisions when the suppliers are more cost effective. However, when outsourcing to supplier, the manufacturer would face the uncertainty of whether or not the delivered task can integrate well with the other parts of the project.

The More the Better? Optimal Degree of Supply-Chain Cooperation between Competitors

We consider the outsourcing strategy problem of two competing original equipment manufacturers (OEMs) whose products are each made up of two components. The OEMs have different specializations, and therefore the component that each firm can produce in-house is different. Each firm must decide whether to outsource the other component to the competing OEM or to a third-party supplier. Prior research has demonstrated that competitors can be better off cooperating as supply-chain partners; therefore, one might expect that, as long as the OEMs are not at a severe cost disadvantage, they should maximize their cooperation as supply-chain partners, especially when competition between products is strong. Interestingly, this study finds that more cooperation between competitors may actually be harmful. Under certain conditions, while one of the OEMs should outsource to the competing firm, the other should outsource to a third-party supplier, even when the third-party supplier is more expensive and the competition is intense.

Competing with Copycats When Customers Are Strategic

In this paper, we use a two-period game theoretical model to examine the decisions of a manufacturer and a copycat firm who are competing for strategic customers. The manufacturer decides on the amount of its market expansion advertising investment in the first period and on its pricing strategy in both periods. Advertising increases the “size of the pie,” but eventually the manufacturer may end up inadvertently sharing the benefits with the copycat. After the first period, the copycat makes a market-entry decision, and, if it opts to enter, it also decides on a pricing strategy. The customers are strategic, and they decide whether or not to buy, when to buy, and which product to buy. We find that, interestingly, lower quality levels of the manufacturer’s product may increase the manufacturer’s prices and profit. Moreover, the manufacturer may be worse off when customers are more likely to purchase its product immediately rather than wait for a price reduction or for the copycat’s product. Finally, the co...