A co-opetitive newsvendor model with product substitution and a wholesale price contract

When an original equipment manufacturer (OEM) sources key components from one contract manufacturer (CM), the CM may produce its own-brand product to compete against the OEM. Therefore, these two firms have a co-opetitive relationship. We develop a co-opetitive newsvendor model in which two newsvendors (OEM and CM) compete against each other in the format of product substitution. Moreover, the CM also serves as the only supplier to the OEM. We find that whether the CM's final product is substitutable for the OEM's product is the prerequisite condition that allows the CM to utilize its monopoly power in the key component market and earn extra profits. This result implies that being the only key component supplier of another newsvendor cannot automatically bring extra profits to the CM, except that the CM's final product has a reasonable competitive advantage against the OEM's final product. Furthermore, relative to the output of the purely competitive supply chain, the co-opetitive supply chain can achieve higher joint profits if the CM can fully compete against the OEM, i.e., the CM's product can be treated as a perfect substitute for the OEM's product. We also find that in the traditional selling to the newsvendor setting, when effective demand increases, the retailer (OEM) could be less profitable. Furthermore, we extend the discussion to the cases of horizontal decentralization and Nash bargaining. A parallel Cournot competition case is also discussed.