Quality and Private Label Encroachment Strategy

Abstract

We consider a supply chain consisting of an incumbent national brand manufacturer and a retailer, who wishes to determine the private label encroachment strategy. By investigating the cost–quality trade‐off between lower‐ and higher‐quality private labels, we characterize the retailer's optimal encroachment decisions. Intuitively, the retailer would choose to introduce a lower‐quality private label when the quality of the national brand is high. However, we find that a higher‐quality private label may better benefit the retailer under certain conditions. Moreover, we establish that introducing a higher‐quality private label can improve both channel profit and consumer welfare. Using the results we derive, we explain the market practices and provide useful guidelines for retailers’ private label encroachment decisions.