Store brand introduction in a dual-channel supply chain: The roles of quality differentiation and power structure

Abstract

In this paper, we consider a dual-channel supply chain that consists of a manufacturer selling national brand products to customers through a retailer and a direct channel. The main issues addressed here are whether the retailer in such a context will introduce a store brand (SB) and if so, how would quality differentiation and power structure shape the introduction incentive and firm profitability. To this end, we develop game-theoretic models based on whether the SB is available and which firm has a prior claim to the profit-maximizing prices. Analysis of the equilibrium outcomes shows that the retailer is profitable to adopt the introduction strategy only when the quality of the SB exceeds certain values. Counterintuitively, increasing the retailer’s power may not incentivize SB introduction. We reveal that there are thresholds associated with inter-brand substitutability below which the dominant retailer has fewer incentives to introduce the SB. Interestingly, the retailer when finding SB introduction is favorable may express preferences for power, abdicate power initiatively, or strive to be the game follower to improve profitability – a phenomenon that never arises in the absence of the SB. Although the manufacturer sustains losses from SB introduction, under some circumstances those sufferings can be alleviated by relinquishing possession of power to the retailer. Additionally, our key findings remain valid under positive production costs or when the retailer introduces high-quality SB products.