Contract manufacturer encroachment and its impact on OEM’s sales mode and social welfare in a platform-based supply chain

Recently, contract manufacturers are increasingly establishing their private labels to compete with the national brands of original equipment manufacturers (OEMs) on the online platform (i.e., contract manufacturer encroachment). Yet, the extant literature rarely concerns the contract manufacturer’s encroachment strategy (non-encroachment, encroachment through the reselling or agency-selling modes) under different sales modes of the OEM and their strategic interplay, although this structure is common in practice. Considering a three-tier supply chain consisting of a contract manufacturer, an OEM and an online platform, we develop a game-theoretical model to examine the interactions of the contract manufacturer’s encroachment strategy and the OEM’s sales mode choice. We show that the OEM using the agency mode encourages the contract manufacturer to encroach through the agency mode, while the contract manufacturer encroaching via agency selling increases the probability that the OEM adopts the reselling mode. Surprisingly, to deal with the contract manufacturer encroachment, the OEM may utilize the reselling mode instead of the agency mode. Furthermore, we find that in most cases, contract manufacturer encroachment can increase the profits of the contract manufacturer and the platform but reduce the OEM’s profit, whereas in a few cases, the encroachment can achieve a win-win-win situation for the three firms. Moreover, contract manufacturer encroachment always increases consumer welfare but may reduce social welfare. In addition, the extended model investigates the influence of the game sequence and shows that there is a first-mover advantage for the OEM and a second-mover advantage for the contract manufacturer.