Strategic Cooperation with Differential Suppliers’ Ability under Downstream Competition in Complex Products Systems

Abstract

This paper investigates the strategic cooperation of two competitive suppliers with different abilities and a weak main manufacturer in Complex Products Systems (CoPS), where a main manufacturer signs a revenue-sharing contract based on a relationship-specific investment with the stronger supplier. The stronger supplier provides one key element to the main manufacturer and encroaches on the downstream market by producing substitutable final products simultaneously. We consider multi-period decisions, by building different models based on centralized, decentralized, and cooperative decisions. The equilibrium strategies are characterized under downstream competition, and optimal cooperation strategies are derived by building multi-period game models. The results show that strong cooperation can enhance the economic performance of each individual as well as the whole supply chain. The weak main manufacturer would face the risk of strong suppliers’ supply interruptions when the competitive degree of suppliers and downstream competition are fierce enough under decentralized decisions. Additionally, the gap in the abilities of the two competitive suppliers reduces the main manufacturer’s profitability. However, the revenue-sharing contract based on a relationship-specific investment can motivate the strong supplier to establish cooperation relationship and improve both stakeholders’ profitability. Moreover, strategic cooperation is efficient to prevent the strong supplier encroaching on downstream and has a positive impact on boosting the weak main manufacturer’s market share. Meanwhile, nurturing a domestic supplier is an effective measure for improving competitiveness and indigenous technological capability of the main manufacturer in CoPS. Finally, some useful management sights on cooperation strategy and optimal decisions are derived.

Keywords

Cooperation / downstream competition / CoPS / contract coordination / suppliers’ ability

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