How to compete with a supply chain partner: Retailer's store brand vs. manufacturer's encroachment

Abstract

Largely due to the rapid development of e-Commerce, manufacturers can sell their national brands (NBs) directly to consumers, a business practice known as manufacturer encroachment. To compete with national brands (NBs), retailers can introduce store brands (SBs) as lower-quality substitutes. They can also launch premium store brands (PSBs) to capture top consumers. In this paper, we focus on a supply chain with a manufacturer and a retailer, and develop game theoretic models to investigate the strategic interactions between manufacturer encroachment and the retailer's introduction of a PSB or an SB. Our main findings include the follows. First, on the one hand, manufacturer encroachment might not prevent the retailer from introducing a competitive store brand. On the other hand, the retailer introducing an SB can prevent manufacturer encroachment, while introducing a PSB cannot. Second, contrary to conventional wisdom, we find that if the cost of introducing a PSB is low for the retailer, this could make the entry threat of the PSB more credible. Consequently, the manufacturer would encroach and the retailer fails to realize the most profitable scenario. Third, both first- and second-mover advantages are present in the equilibrium outcomes for the two firms. In particular, the presence of the second-mover advantage depends on the quality gaps among different brands. Overall, our results and managerial insights can help a supply chain and its firms formulate their brand and channel strategies.