Competing product service in an OEM supply chain with upstream module suppliers as service providers

Abstract Modular production brings new opportunities for service provisions. We examine a supply chain consisting of two competing module suppliers and a common manufacturer, in which the manufacturer sources two differentiated modules from two suppliers and then produces two competing products for consumers. A delegation relationship is applied to explore the possibility of the module services offered by the suppliers. When the service commission fees are fixed, there exist optimal commission fees to maximize the manufacturer's profit. Service commission fees, service efficiencies, service sensitivity, and market types greatly affect the service levels, prices, and profitability of each member in the supply chain. The manufacturer should strategically adopt differentiated pricing strategies and service provisions from two suppliers rather than the best service abilities of the suppliers. In the service‐level sensitivity market, the improved service levels are more attractive to consumers so that the manufacturer will charge high prices by investing more in services. Product services with “high quality, high price” are more suitable for high‐end consumers. We also consider the variable service commission fees and find that there are still some robust results except that the effects of the service incentives and the commission fees will be enlarged.