We study the co‐opetition strategy between a manufacturer of a proprietary component (MPC) and an original equipment manufacturer (OEM). The MPC can choose to supply components to the OEM and can also compete in the end market with its own final product. Customers can purchase from either firm and are strategic in that they choose whether to buy now or later. In a two‐period game theoretical model, we analyze the MPC's optimal co‐opetition strategy, which mainly concerns whether to sell to the OEM or to enter the end market. The optimal strategy can be characterized by the customer's patience to wait and the competitor's product quality. We then extend our model to investigate three key factors: new customers arriving late, cost differentiation between the two firms, and the existence of a third‐party supplier. While in the first two extensions the optimal strategies remain qualitatively the same as in the main model, the existence of a third‐party supplier impacts the MPC's choice of co‐opetition strategy crucially. We discuss how the MPC should balance cooperation and competition, and characterize the conditions when the MPC should change strategy.
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