One step further for procurement cooperation: will the industry leader benefit from its competitive manufacturer's joint determination of consumption quality?

Abstract

In practice, consumption quality refers to “production quality + category image”, where the former is determined by a contract manufacturer (CM) and the latter is promoted by an industry leader. In this paper, we explore whether the industry leader should cooperate with the CM deeply by pooling their component procurement orders when the CM sells its self-branded products with the same consumption quality as the industry leader's. We find that there are two driving forces that shape the industry leader's procurement cooperation decisions: (1) The supplier's pricing power can be constrained under procurement cooperation, resulting in profit foci coordination between the industry leader and the CM, while (2) the industry leader's brand advantage can be either a positive or a negative driving force in its preference of procurement cooperation. We identify an interesting zone with respect to the industry leader's brand advantage in which the industry leader, the CM, and the supplier are better off without procurement cooperation. We further show the robustness of our main results by considering the impact of partial spillover in category image promotion and varying investment coefficients.

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