Product Line Extensions and Technology Licensing with a Strategic Supplier

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

31 Scopus Citations
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Detail(s)

Original languageEnglish
Pages (from-to)1121-1146
Journal / PublicationProduction and Operations Management
Volume25
Issue number6
Online published22 Dec 2015
Publication statusPublished - Jun 2016

Abstract

In many industries, original equipment manufacturers (OEMs) must obtain critical components from a few powerful suppliers. To the extent that the OEMs are also concentrated, the interactions between the suppliers of critical components and the OEMs are strategic, and have implications for how an incumbent OEM chooses its product line and interacts with potential rivals. We demonstrate that, by adding a low-end product line extension, an OEM can induce a strategic supplier to offer more favorable pricing. Moreover, depending upon the cost structure and relative performance of the product line extension, the OEM may benefit even more from the low-end line extension if it is produced by a rival instead of by itself, even if it cannot obtain any licensing income from it. Among other things, we show that this can result in a decentralized OEM accommodating competition from rivals producing product line extensions that would not be developed in a vertically integrated supply chain. In an extension, we re-examine the common assumption that the supplier unilaterally dictates a single wholesale price that is available to all downstream buyers. We demonstrate that, by committing to offer a lowest available wholesale price to all downstream buyers, a supplier can encourage an incumbent OEM to share its technology (or otherwise accommodate the entry of a rival) so that the supplier, the incumbent OEM, and the rival are all better off.

Research Area(s)

  • game theory, marketing strategy, competition, vertical differentiation, strategic effect, DOWNSTREAM COMPETITION, ASYMMETRIC INFORMATION, ENCROACHMENT, ROYALTY, PATENT, MARKET, CANNIBALIZATION, SEGMENTATION, QUALITY, VARIETY

Citation Format(s)

Product Line Extensions and Technology Licensing with a Strategic Supplier. / Chen, Liwen; Gilbert, Stephen M.; Xia, Yusen.
In: Production and Operations Management, Vol. 25, No. 6, 06.2016, p. 1121-1146.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review