Multi-period Outsourcing Decision in the Presence of Supplier Copycatting

Abstract

Supplier copycatting occurs when the supplier to a manufacturer copies the manufacturer's original product and encroaches on the market with copycat product. This increasingly common phenomenon poses unprecedented challenges to both manufacturers and suppliers worldwide. To address to this problem, the manufacturers can always change their suppliers and thus expand their future outsourcing opportunities; at the same time, copycatting suppliers run the risk of encountering repercussions (e.g., losing the manufacturer's future business) if they get caught copying the manufacturer's product. Previous research has not considered the impact of either of these realities. To fill this gap in the literature, we propose a multi-period game-theoretic approach to supplier copycatting. We investigate a setting with an original manufacturer that outsources the production of its product in each period to its preferred supplier(s). The supplier pool is characterized by a supplier of high process quality with copycatting capabilities, and a supplier of low process quality without copycatting capabilities. We examine how the parties’ optimal decisions are influenced by two factors: the presence of the manufacturer's future outsourcing opportunities and the possible repercussions facing the copycatting supplier. Our results indicate that (a) an increase in the quality of the copied product can make the manufacturer switch from outsourcing to the low-quality supplier to outsourcing to the copycatting supplier and, at the same time, improve the manufacturer's profits, (b) upon an improvement in the quality of the low-quality supplier, the manufacturer may abandon the low-quality supplier and outsource to the copycatting supplier, and (c) both suppliers might be worse off from an improvement in process quality. These results, which only exist in the multi-period game, have strong implications for manufacturing managers who share their intellectual property and outsource production, as well as suppliers and contractors to original manufacturers.

Keywords: multi-period; copycat; competition; game theory; supply chain management

JEL Classification: m11,m16