Store brand introduction, retail competition and manufacturers’ coping strategies

Abstract

Many retailers offer store brands, which causes fierce competition between store brands of different retailers. In this paper, we discuss whether a retailer should launch a store brand when another retailer may also introduce a store brand. We find that if a store brand’s base level of demand is low, the retailer is more likely to launch the store brand when the degree of competition between the store brand and the national brand is lower. Our finding contrasts with the literature, which indicates that the store brand should be introduced when the competition is fierce. Moreover, both retailers have incentives to introduce store brands, although they obtain less profit due to the introduction of store brands. Furthermore, when a retailer launches a store brand, the manufacturer should not tilt trade terms towards the retailer with the store brand and may increase the wholesale price of the national brand. Our finding provides support for the Robinson–Patman Act, which requires the manufacturer to offer all retailers with products at identical wholesale prices. Finally, we identify the conditions under which one retailer only sells the national brand and another retailer only sells the store brand.