Essays on ingredient branding

Most products have ingredients supplied by others, some of which are branded and the others are not. This dissertation consists of two essays, studying two different issues in ingredient branding and supply chain relationships. The first essay, "Communicating ingredient quality to consumers," studies how a supply chain---an end-product manufacturer and its ingredient supplier---can effectively communicate the superior ingredient quality to consumers. One approach is to signal the high quality with excessively high price. We identify the equilibrium strategy and find that such price distortions are costly to both supply chain members. An alternative approach to communicating ingredient quality is through co-branding the logos by the end-product manufacturer either on the end-product or in advertisement. Unlike the signaling approach, co-branding requires upfront investment in building the ingredient brand but eliminates the need for price distortions. We find that both the supply chain members benefit from co-branding an established ingredient brand. The supplier can secure a greater share of such benefits than the manufacturer does if and only if the ingredient has sufficiently superior quality and/or sufficiently lower production cost.; The second essay, "Manufacturers' choice of ingredient supplier: Branded vs. generic ingredients," studies an end-product manufacturer's choice between two suppliers, one supplying a branded ingredient and the other a generic. If two vertically differentiated manufacturers make this choice simultaneously, which would benefit more from adopting the branded ingredient and more likely to adopt it? In our model, the two manufacturers negotiate simultaneously with the supplier of a branded ingredient over the supply contracts. We show that in equilibrium both manufacturers adopt the branded ingredient when its marginal production cost is sufficiently lower than its generic counterpart. However, when the marginal cost is not very low, equilibrium results depend on how consumers perceive the end-product quality. We examine three quality perception functions: substitute, complement, and salience. Under substitute perception, competing manufacturers with different levels of assembly quality either both or neither adopt the branded ingredient. Under complement/salience perception, the manufacturer with higher/lower assembly quality can be the only one adopting it.