How to improve the key component's quality: the impact of overconfident manufacturer's R&D investment

Abstract

In the EV supply chain, R&D cooperation for key components between the manufacturer and tier 2 supplier is common. This paper primarily explores the effects of cross-echelon R&D cooperation and overconfidence on the quality and price of key components, as well as the profits of the manufacturer and suppliers. We assume that the supply chain consists of one tier 2 supplier, one tier 1 supplier, and one overconfident manufacturer. We first present the wholesale price contract as a benchmark, followed by the two-part contract and the equity contract between the tier 2 supplier and the manufacturer. Additionally, we compare above three contracts and provide numerical examples. We find that (1) the manufacturer's overconfidence level and the contract type jointly affect the quality of the key component and the profit of the tier 1 supplier. When the overconfidence level is low or the manufacturer's shareholding ratio is low, the two-part contract is more effective in improving the key component's quality and the tier 1 supplier's profit. Or else, the equity cooperation contract is more effective in improving the key component's quality and the tier 1 supplier's profit. (2) Under the equity contract, the tier 2 supplier can obtain higher profit, while the manufacturer may achieve higher overestimated expected profit under the two-part contract. (3) Under the two-part contract, the manufacturer's overconfidence increases the component's quality and the profit of the tier 1 supplier, but decreases the profit of the tier 2 supplier. In the other two contracts, the manufacturer's overconfidence leads to a decline in the key component's quality and the profits of both the tier 1 and tier 2 suppliers.