Game of brands: Managing brand spillover in a co-opetitive supply chain

This study explores brand management dynamics in a co-opetitive supply chain, where a strong-brand Original Equipment Manufacturer (OEM) outsources production to a competitively weaker brand Contract Manufacturer (CM). The CM can leverage this outsourcing relationship to engage in a brand-freeriding strategy, enhancing its brand power through spillover effects from the OEM’s brand. However, managing this brand spillover presents a challenge, motivating us to develop a game-theoretic model to analyze the interplay between the OEM’s outsourcing decisions and the CM’s brand-freeriding strategy. This model introduces a new brand spillover mechanism facilitated by direct outsourcing between competing firms, diverging from existing literature focused on shared CMs. This shift highlights the complex co-opetition relationship, and reshapes strategic dynamics and incentives for both outsourcing and brand-freeriding strategies. Despite the benefits of the costless brand-freeriding strategy, our results unveil three conditions under which the CM should avoid brand freeriding: when spillover is extremely low, the strategy becomes ineffective; for relatively low spillover, prioritizing outsourcing revenue is crucial; and when spillover is modest, focusing on competitive pricing drives greater profitability. Given the risks of brand spillover, our findings suggest that the OEM might be better off maintaining in-house production to protect its brand equity, even at a cost disadvantage, thus challenging the notion that outsourcing always leads to cost savings. Moreover, comparing equilibrium strategies with and without the CM’s commitment to non-freeriding reveals a potential pitfall. The CM’s brand-freeriding option, while potentially beneficial, can incentivize the OEM to pursue in-house production, jeopardizing the CM’s outsourcing revenue.