Market Entry of Contract Manufacturer under Asymmetric Customer Loyalty

Consider a supply chain comprising a contract manufacturer (CM) and an original equipment manufacturer (OEM). In addition to accepting the OEM's order, the CM may develop its self-branded products and enter the end-market. Because of the OEM's well-known brand and long-term good reputation, we take the asymmetric customer loyalty into consideration—a fraction of customers are loyal customers who only consider buying products from the OEM, while other customers in the market are non-loyal customers who might purchase the CM's products. We explore whether the CM would enter the end-market and if so, what's the optimal quality level in such cases. Counterintuitively, we find that there will be no market entry when the CM is relatively strong, for example, the CM is able to provide self-branded products with relatively high quality or has sufficiently large bargaining power. What's more, when the market size of the non-loyal customers is large or their willingness-to-pay is high, the market entry of the CM will not occur, either. We also reveal different relationships between the CM's profit and its self-branded product quality. The higher quality level of the self-branded product does not always benefit the CM. From numerical simulation, we find that although the market entry always hurts the OEM, the supply chain may get benefit especially when the CM could endogenously determine its self-branded product quality level.