Supplier's entry decision and optimal quality level in a co-opetitive supply chain

Consider a co-opetitive supply chain comprising a manufacturer and a key component supplier. The latter may develop its self-branded business and hence become the manufacturer's upstream partner and downstream competitor. Given the quality level of the manufacturer's product, we study whether the supplier should enter the market and if so, what's the optimal quality level. We also study whether the manufacturer should withdraw orders and produce in house at a higher cost. We find that the supplier's quality level will not be higher than the manufacturer's. We also find that it's conditional for the supplier to drop the contract manufacturing business.