Contract manufacturer versus platform: quality innovation strategy with brand spillover effect

Abstract

In practice, it is increasingly prevalent for contract manufacturers (CMs) to develop their own brand products and enter end markets within outsourcing supply chains. However, the existing literature rarely delves into the impact mechanism of the original brand on the positive spillover effects on own brand products, nor does it pay sufficient attention to the issue of who should spearhead quality innovation for own brand products. Using a game‐theoretic model, we examine a supply chain where a brand manufacturer outsources its production to a CM. Leveraging the spillover effect, the CM enters the market with a competing product under its own brand. Both the brand manufacturer and the CM distribute their products via a common online platform. Driven by this observed business phenomenon, this study analyzes two scenarios: CM‐led innovation and platform‐led innovation. The results show that: when the platform's commission rate is low, having the CM take the lead in innovation results in higher‐quality own brand products, and both the CM and the platform can achieve higher profits. When the platform's commission rate is at a medium level, regardless of whether the spillover effect is large or small, the CM is more inclined toward the platform‐led innovation model. Even when there is a relatively high spillover effect, as long as the commission rate does not reach a sufficiently high level, the platform can still earn more profits by adopting the CM‐led innovation model.