Price competition and store competition: Store brands vs. national brand

Abstract

This paper studies pricing strategies in a market channel composed of one national brand manufacturer and two retailers who, each, carry their own store brand and a national brand products. The model accounts for product competition between store brands and the national brand products, as well as for store competition between retailers.We use a game-theoretic model to examine a variety of channel leadership structures that consider strategic interactions both at the vertical level (between manufacturer and retailers) and at the horizontal level (between retailers). This extends the existing literature in main three directions: (a) accounting for both store competition and product competition in the same model, (b) considering a more comprehensive study including all possible interactions between channel members in this context, and (c) introducing horizontal price leadership between the retailers.Our results suggest that to be more successful and reap higher profits every retailer should pursue greater store differentiation relative to other competing retailers and less brand differentiation relative to the national brand to provide relatively homogeneous brands in a well differentiated store. On the other hand, the manufacturer should differentiate his national brand more from the retailers’ store brands and deal with as many and less strategically powerful retailers as possible. From the consumers’ perspective, the manufacturer’s leadership represents the worst scenario as it leads to the highest retail prices for all brands. The lowest prices for the store brand are reached when the retailers have vertical price leadership and for the national brand when there is no leadership.