Mode of store-brand introduction and contracting sequence under manufacturer encroachment

Abstract

In recent years, retailers have spent heavily to develop and introduce store brands. Many store brands are regarded as mature brands and are popular with consumers. This paper investigates a retailer's preference for the mode of store-brand introduction and how a retailer enters into wholesale price contracts with a national brand manufacturer (NBM) and a store brand supplier (SBS) when buying a store brand product (SB). We develop a game theoretic model consisting of a NBM, a retailer, and an outside SBS, where the NBM sells a national brand product (NB) through the retailer and its direct channel. The retailer decides how to introduce a SB. If buying the SB, the retailer chooses either simultaneous or sequential contracting. The results show the retailer should not introduce the SB when the quality disadvantage of the SB is pronounced. Interestingly, for an intermediate SB quality, the retailer chooses to buy the SB under simultaneous contracting. If the SB has a high quality and the fixed cost is at an intermediate level, the retailer can earn more by buying the SB when the SB quality is relatively low; otherwise, the retailer would like to produce the SB. Furthermore, we find that the retailer always fails to earn a profit under two different contracting sequences, if the SB quality is low. Surprisingly, the retailer always chooses simultaneous contracting, if the SB quality is high. The results of this study may help a retailer choose the mode of store-brand introduction and the contracting sequence.