Competition or coopetition? Equilibrium analysis in the presence of process improvement

• Coopetition between original equipment manufacturer (OEM) and its supplier. • Process improvement in component production affects coopetition equilibrium. • Without process improvement, coopetition never occurs. • Coopetition occurs when the supplier-initiated process improvement is efficient. • With OEM-initiated process improvement, coopetition never happens. Coopetition is a business phenomenon that dominates many supply chains. We aim to understand why and how coopetition occurs in supply chains with the presence of process improvement in upstream component production. An original equipment manufacturer (OEM) can purchase the component from either a non-competing supplier (NS) or a competing supplier (CS) that also sells substitutable products in the end consumer market. We demonstrate that without process improvement, coopetition does not exist, because the OEM prefers sourcing from the NS, even though the CS is willing to sell the component to the OEM. Two cases are considered in which process improvement is present: supplier-initiated investment, where the suppliers conduct self-investment, and OEM-initiated investment, where the OEM invests in the supplier's process. We find that with supplier-initiated investment, the CS always prefers coopetition, but the OEM may not. When the investment is efficient, coopetition occurs as an equilibrium outcome; otherwise, competition occurs. The cause of coopetition equilibrium comes from variable process improvement incentives of the CS that derive from two driving forces: the vertical wholesale price effect and the horizontal quantity competition effect. When the degree of product substitution is low, the CS increases its investment and lowers its wholesale price, benefiting the OEM. When the degree of product substitution is high, the CS reduces its investment as well as production quantity, which also benefits the OEM. Interestingly, with OEM-initiated investment, the CS might not always choose to sell the component to the OEM, and as a result, coopetition never occurs.