Supplier´s entry decision and optimal quality level in a co-opetitive supply chain

Consider a co-opetitive supply chain comprising a manufacturer and a key component supplier. The latter may develop its self-branded business and hence become the manufacturer´s upstream partner and downstream competitor. Given the quality level of the manufacturer´s product, we study whether the supplier should enter the market and if so, what´s the optimal quality level. We also study whether the manufacturer should withdraw orders and produce in house at a higher cost. We find that the supplier´s quality level will not be higher than the manufacturer´s. We also find that it´s conditional for the supplier to drop the contract manufacturing business.