Fighting store brands through the strategic timing of pricing and advertising decisions

Abstract

This paper investigates whether manufacturers can use the timing (sequence) of their pricing and advertising decisions to benefit from or to deter store brand (SB) introductions. We develop and solve six sequential game-theoretic models for a bilateral channel where different timing of these decisions are considered before and after the retailer introduces a store brand. Comparisons of equilibrium solutions across games show that the sequence of pricing and advertising decisions in the channel significantly impacts the profitability of a store brand entry by the retailer. Such impact depends on: (1) whether each channel member decides on pricing and advertising simultaneously or sequentially prior to the SB entry, (2) whether the timing chosen for these decisions changes following the SB introduction, and (3) the intensity of competition between the store and national brands (NB). In particular, the SB entry leads to losses for the manufacturer when the sequence of advertising and pricing decisions is kept unchanged after the SB entry even when it is much differentiated from the NB. These results offer new perspectives on the effects of store brand entry in distribution channels, and suggest that for low levels of competition intensity between the NB and the SB, the manufacturer can either prevent or benefit from the retailer’s brand given an adjustment in the sequence of the manufacturer’s decisions.