A Win–Win strategy analysis for an original equipment manufacturer and a contract manufacturer in a competitive market

This paper investigates the outsourcing relationship between an original equipment manufacturer (OEM) and a contract manufacturer (CM) when both compete in the same product market. We identify optimal solutions and the favorable conditions that both players may benefit from outsourcing when either one is the dominant player in the Cournot competition in the base setting. In the extended models, we include a supplier in the game who sells the key component to the CM and explore all players’ decisions on pricing and/or quantity. We find that the optimal wholesale price for outsourcing is normally higher when the CM is dominant than that when the OEM is dominant. The Win–win conditions that both the OEM and the CM favor outsourcing in various scenarios are identified. There exist some scenarios that no outsourcing will be formed due to conflicting interests between the OEM and the CM. The supplier may benefit from outsourcing due to additional OEM's quantity when the OEM's production cost is high. In that case, a Win–Win–Win result for outsourcing occurs for all three players in the extended model.