Ingredient Branding Strategies in an Assembly Supply Chain: Models and Analysis

Abstract

We consider a supply chain in which an original equipment manufacturer (OEM) procures a key component from a supplier. We consider an ingredient branding strategy under which the supplier and the OEM form a brand alliance. Specifically, the supplier invests in ingredient branding to build up her goodwill and additionally she shares a portion of the OEM’s advertising cost through a cooperative advertising program. Under a differential game framework, we obtain the equilibrium advertising efforts of the supplier and OEM, and the supplier’s equilibrium subsidy rate for the cooperative advertising program. We further extend the model to the case in which the OEM procures two complementary components from two suppliers. We consider three different scenarios of supplier interaction, i.e., the suppliers are (I) independent, (II) allied and keep two brands, and (III) allied and keep one brand. We demonstrate how the different interactions between suppliers affect the channel members’ advertising efforts, goodwill levels, and their profits.

Keywords: Ingredient branding, Cooperative advertising, Goodwill, Differential game models