Pricing decisions under manufacturer's component open-supply strategy

TL;DR

This paper analyzes a three-stage pricing game between a vertically integrated manufacturer and an exterior manufacturer under a component open-supply strategy, considering customer perceived value and cost differences.

Contribution

It develops a demand-based three-stage pricing model and characterizes optimal sourcing and pricing strategies, including supply Pareto zones, under various market conditions.

Findings

Feasible regions for sourcing and pricing decisions are identified.

Customer perceived value significantly impacts pricing and profit outcomes.

Supply strategy Pareto zones are established for different configurations.

Abstract

Faced with huge market potential and increasing competition in emerging industries, product manufacturers with key technologies tend to consider whether to implement a component open supply strategy. This study focuses on a pricing game induced by the component open supply strategy between a vertically integrated manufacturer (who produces key components and end products) and an exterior product manufacturer (who produces end products using purchased key components) with different customer perceived value and different cost structure. This study first establishes a three stage pricing game model and proposes demand functions by incorporating relative customer perceived value. Based on the demand functions, we obtain feasible regions of the exterior manufacturer's sourcing decision and the optimal price decision in each region. Then the effects of relative customer perceived value, cost structure, and market structure on price decisions and optimal profits of the vertically integrated manufacturer are demonstrated. Finally, as for the optimal component supply strategy, we present a generalized closed supply Pareto zone and establish supply strategy Pareto zones under several specific configurations.