Interbrand Competition Research Articles

Reselling or marketplace channel? A manufacturer’s strategic decisions for differentiated brands considering channel’s service level

Brand differentiation is an effective strategy commonly used by large-scale brand manufacturers to produce multiple brands of a particular product type. To avoid undesirable inter-brand competition, a brand manufacturer prefers to adopt multiple online sales channels (OSCs) with different channel’s service levels provided by the online retailer in selling such differentiated brands. Considering both brand and channel’s service differentiation, this joint decision of the brand manufacturer and online retailer achieves the coordination of retail supply chain. Our study is based upon a model that consists of a responsible brand manufacturer(he) that aims to maximise profits and enhance consumer surplus (CS). He offers two brands with differentiated consumer acceptances, a premium and an economy brand. Also, he chooses between two OSCs (a reselling and a marketplace channel) to provide different levels of services. The brand manufacturer’s OSC strategies are investigated according to the interplay between brand and service differentiation, and profits and CS, respectively. The results show that the brand manufacturer prefers differentiated OSCs for two brands as service differentiation decreases. Also, at low brand differentiation and alternatively, high brand differentiation and low service differentiation, the brand manufacturer and consumers show different OSC preferences. Finally, a case study is performed to validate our results.

The bright side of outside market entry with manufacturer encroachment

This study discusses the possible benefits of inviting entrants for downstream retailers when facing the encroachment of their upstream manufacturers. We consider a model comprising one retailer, one manufacturer, and one potential entrant. The manufacturer decides whether to encroach or supply the retailer; The retailer decides whether to help a third-party firm overcome its entry barrier. We show that whether firms compete in quantity or price, the manufacturer, in the presence of an entrant, may choose to supply the retailer even if the retailer does not offer any advantages in terms of cost efficiency in retailing or channel differentiation. This is because, in such a scenario, the manufacturer treats the retailer as a strategic collaborator to either restrict the entrant’s market share or alleviate the downstream competition. In other words, triggering the intra-brand competition against the retailer may help the manufacturer perform better in the inter-brand competition against the entrant. On the other hand, the retailer may intentionally prompt entry to trigger inter-brand competition to avoid being foreclosed by the manufacturer and obtain a favorable procurement condition.

The German Federal Supreme Court’s Judgment in Booking.com as a Case Study of the Limitations of Competition Law

The German Federal Supreme Court (BGH) held that the use of narrow price parity clauses (NPCs) between Booking.com and hotels infringed Art. 101 Treaty on the Functioning of the European Union (TFEU), confirming the Federal Cartel Office’s decision. The Supreme Court based its judgment mainly on the following grounds: (1) the use of these clauses restricts intra and inter-brand competition between hotels; (2) NPCs cannot be considered an ancillary restraint in the sense of Art. 101(1) TFEU; and (3) avoiding free-riding through these clauses cannot be considered as a justifying efficiency in the present case under Art. 101(3) TFEU. The present comment focuses on the analysis of the Court regarding (3) and argues that the reasoning in the judgment made conceptual mistakes and statements against settled EU law. The case shows the difficulties the Court had in handling a case where dynamic considerations are important. Therefore, even though the Court may have had valid concerns regarding NPCs, the judgment at hand is a step in the wrong direction regarding the judicial function of guidance of undertakings throughout the economy that wish to comply with competition law.

Personalized Pricing and Distribution Strategies

The availability of consumer data is inducing a growing number of firms to adopt more personalized pricing policies. This affects both the performance of, and the competition between, alternative distribution channels, which in turn has implications for firms’ distribution strategies. We develop a formal model to examine a brand manufacturer’s choice between mono distribution (selling only through its own direct channel) or dual distribution (selling through an independent retailer as well). We consider different demand patterns, covering both horizontal and vertical differentiation and different pricing regimes, with the manufacturer and retailer each charging personalized prices or a uniform price. We show that dual distribution is optimal for a large number of cases. In particular, this is always the case when the channels are horizontally differentiated, regardless of the pricing regime; moreover, if both firms charge personalized prices, a well-designed wholesale tariff allows them to extract the entire consumer surplus. These insights obtained here for the case of intrabrand competition between vertically related firms are thus in stark contrast to those obtained for interbrand competition, where personalized pricing dissipates industry profit. With vertical differentiation, dual distribution remains optimal if the manufacturer charges a uniform price. By contrast, under personalized pricing, mono distribution can be optimal when the retailer does not expand demand sufficiently. Interestingly, the industry profit may be largest in a hybrid pricing regime, in which the manufacturer forgoes the use of personalized pricing and only the retailer charges personalized prices. This paper was accepted by Joshua Gans, business strategy. Funding: The financial support of the European Research Council under the European Union’s Horizon 2020 research and innovation programme [Grant Agreement 670494] and of the Agence nationale de la recherche (ANR) [Grant ANITI (ANR Grant 3IA)] and [Grant CHESS ANR-17-EURE-0010] (Investissements d’Avenir program) is gratefully acknowledged. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4437 .

Organizational form and multiple exportable goods in export rivalry trade

AbstractFocusing on the multiple exportable goods between intrabrand and interbrand competition in the export rivalry market, we analyze foreign firms' endogenous choice of organizational form in the face of tariffs. It is shown that if the degree of intrabrand competition is sufficiently high, firms provide corporate incentives (i.e., U‐form) when goods are substitutes and divisional incentives (i.e., M‐form) when goods are complements, and vice versa. This result relating to the prisoner's dilemma situation depends on which effect between the tariff level and incentive terms dominates. In the case of a low degree of intrabrand competition, choosing the M‐form (U‐form) brings about Pareto efficiency for foreign firms' profits and social welfare in the importing country when goods are substitutes (complements). In contrast to previous studies, when comparing the case of no delegation with the M‐form or U‐form, the Pareto optimum can also be achieved for both foreign firms choosing the M‐form or U‐form endogenously and the importing country, without a prisoner's dilemma involving no delegation.

STORE PROMOTION, MANUFACTURER COMPETITION AND WELFARE

This study evaluates the partial exclusion effects of store promotion. We find that a manufacturer with a better brand name has a higher willingness-to-pay for promotion services offered by retail stores or online platforms. The promotion results in higher sales-weighted average prices (wholesale and retail) and a larger inter-brand price gap. The stores or platforms extract more profits from manufacturers and consumers through the promotion services. The effects on consumer surplus and social welfare depend on whether the promotion alters consumer preferences. If it does, more consumers would be choosing their less-preferred brands because of the larger inter-brand price gap, which would be socially inefficient. If it does not, the promotion may help to correct the price distortion, but the social welfare effect is positive only when the promotion effect is small enough. In both cases, the promotion services reduce the total consumer surplus by softening inter-brand competition.

Shelf space allocation game with private brands: a profit-sharing perspective

This work examines the role of a non-price variable, shelf-space in inter-brand competition. The retailer introduces a private brand to control the prices of the national brand, which acts as a monopoly in the absence of any competition from other brands. The private brands compete with national brands for demand, which is a function of the allocated shelf space and the brand price. We propose a game-theoretic model involving a national brand and a private brand who compete horizontally in the supermarkets for shelf space. A comparative study is undertaken through two different cases. In the first case, the retailer promotes the private brand manufactured by itself followed by the second case wherein retailer sells the private brand produced by another manufacturer. The retailer allocates shelf space to both the national as well as private brand simultaneously to capture the competition. The manufacturer of the national brand acts as the stackelberg given its power of setting wholesale prices. The equilibrium of the profit maximization game is expressed in terms of prices, shelf-spaces and profit margin of the players. This work is an attempt to gain insights on the conditions of allocation which are profitable for the manufacturer taking into account the consumer preferences between competing brands. The study also indicates that manufacturer’s profits reduces when they compete for space and make the retailer dominant, when the latter is only involved in shelf space allocation without any in-house production. We contribute as building blocks to understand how shelf-space limitation intensifies the manufacturer-retailer competition and also obtain managerial insight on disproportionate distribution of profits.

Delegation in Multiproduct Downstream Firms with Heterogeneous Channels

Incorporating the extension of exclusive dealing into Cournot competition, we analyze the multiproduct downstream firms' choice of organizational form between U-form and M-form. With managerial delegation in downstream firms, we find that choosing U-form for the downstream firms is a dominant strategy under partial exclusive dealing, while M-form is a dominant strategy under exclusive dealing. If the degree of interbrand competition is sufficiently large when comparing U-form and M-form in equilibrium, social welfare and consumer surplus with U-form under partial exclusive dealing are greater than those with M-form under exclusive dealing, and vice versa. Furthermore, when decentralized bargaining is allowed, we find that (i) the strategic delegation is redundant and (ii) regardless of channel structure, one downstream firm chooses M-form and the other downstream firm chooses U-form except for small intermediate range of substitutability.enter

PRO52 EXPENDITURE, UTILIZATION, AND PRICE OF SPECIALTY DRUGS FOR MULTIPLE SCLEROSIS IN THE U.S MEDICAID POPULATION 2008 - 2018

Multiple sclerosis (MS) is a rare, long-standing, and disabling disease that affects the central nervous system and causes several clinical manifestations. As a result, this disease is associated with a high societal economic burden. To analyze the trends in drug expenditure, utilization, and cost of specialty drugs for the treatment of patients with MS in the US Medicaid program. In this retrospective drug utilization research analysis, we obtained prescription data and reimbursement of disease-modifying therapies for MS from the Centers for Medicare & Medicaid Services Medicaid State Drug Utilization Data between January 2008 and December 2018. The specialty drugs considered in our analysis included dimethyl fumarate, fingolimod, teriflunomide, cladribine, siponimod, alemtuzumab, natalizumab, ocrelizumab, daclizumab, glatiramer acetate, peginterferon beta-1a, interferon beta-1a, and interferon beta-1b. The annual trends of the number of prescriptions, reimbursement expenditures, and costs were calculated. The average reimbursement per prescription was calculated as an estimate of the drug cost. The annual MS drug utilization increased from 85,209 prescriptions in 2008 to 223,604 in 2016, and then decreased to 194,877 in 2018. The annual reimbursement surged by 633% in the 10-year study period between 2008 and 2018, from almost $172 million in 2008 to more than $1.4 billion in 2017, and then to approximately $1.26 billion in 2018. The cost per prescription increased over time for most MS brand-name drugs (eg, from $2033 in 2008 to $5114 in 2018 for natalizumab, and from $19,138 in 2016 to $23,588 in 2018 for alemtuzumab). In 2008, self-injectable drugs dominated the market. In recent years, a shift has occurred in the utilization and reimbursement of MS drugs, with oral medications becoming predominant. The study findings indicate intermarket and interbrand competition among the MS specialty drugs. The growing utilization and spending trends for specialty MS medications are significant and sizable in the US Medicaid programs. Medicaid cost-containment strategy is warranted to control the economic burden of state budgets across the country.

Product2Vec: Understanding Product-Level Competition Using Representation Learning

Studying competition and market structure at the product level instead of brand level can provide firms with insights on cannibalization and product line optimization. We introduce Product2Vec, a method based on representation learning, to study product-level competition when the number of products is large. The proposed model takes shopping baskets as inputs and, for every product, generates a low-dimensional vector that preserves important product information. Using these product vectors, we present several findings. First, we show that these vectors can recover analogies between product pairs. Second, we create two measures, complementarity and exchangeability, that allow us to determine whether product pairs are complements or substitutes. Third, we combine these vectors with traditional choice models to study product-level competition. To accurately estimate price elasticities, we modify the representation learning algorithm to remove the influence of price from the product vectors. We show that, compared with state-of-the-art choice models, our approach is faster and can produce more accurate demand forecasts and price elasticities. Fourth, we present two applications of Product2Vec to marketing problems: 1) analyzing intra- and inter-brand competition and 2) analyzing market structure. Overall, our results demonstrate that machine learning algorithms, such as representation learning, can be useful tools to augment and improve traditional marketing methods.

Ohio v. American Express: Misunderstanding Two-Sided Platforms, the Credit Card 'Market,' and the Need for Procompetitive Justifications

In Ohio v. American Express Co., the United States Supreme Court had its first knowing encounter with what it incorrectly viewed as a two-sided platform in the context of American Express’ Non Disclosure Provisions (NDP). Under these provisions merchants accepting the American Express card for payment are not permitted to inform consumers that other cards charge merchants less for their use and that this could be reflected in the final price paid. The opinion includes poor reasoning, a lack of attention to precedent, and bad news for those who thought antitrust law was due for a revival. Yet, and perhaps surprisingly, the outcome may be correct. Part II of this Essay very briefly summarizes the antitrust landscape in order to provide an understanding of where the practices of America Express fit. Part III then discusses the two-sided market issue generally and how it was treated in American Express specifically. That Part includes an explanation of why what was involved in American Express was actually a one-sided market that had been segmented in the interests of price discrimination. In fact, American Express and its competitors sell a single product to one group of customers: the right to delay payment to purchasers of goods and services. Part IV also makes the point that the American Express system shares characteristics of tying, resale price maintenance, and exclusive dealing. It further claims that the NDP shares none of the qualities that make those practices frequently lawful. American Express’s activity skirts the edges of several vertical restraints and its underlying character restricted interbrand competition. Part V includes general observations about the case and suggests the outcome may be correct but that the reasoning employed to get there is troublesome in that it continues the trend to minimize the importance of antitrust law.

Intra-brand patent licensing with inter-brand competition

The existing literature has considered licensing of a patented cost-reducing innovation either in a homogeneous good industry or in a differentiated goods industry. We consider a new model of patent licensing between producers of a homogeneous good when there is competition from producers of another brand in the market. We find that for drastic innovation, the optimal intra-brand patent licensing involves only fixed fee when the degree of inter-brand differentiation is low and a two-part tariff otherwise. For non-drastic innovation, the optimal intra-brand patent licensing involves only royalty when the degree of inter-brand differentiation is high, a two-part tariff when it is intermediate, and finally a fixed fee alone when it is low. We also establish that the innovator has more incentive for innovation as an insider than an outsider of this market.

RADIUS RESTRICTION AND FIRMS' SURVIVAL: EVIDENCE FROM THE COFFEE FRANCHISE INDUSTRY

This study investigates the effects of distance restrictions on Korean coffee shops' survival. Restrictions were implemented by South Korea's Fair Trade Commission to limit the headquarters' opening of new shops to protect franchisees' territorial rights. Using extended Cox proportional hazard regression analyses, we find that the hazard rates of all coffee shops decreased significantly under the radius restriction, with more substantial decreases for young stores, attenuating over store ages. However, selective restrictions on five big brands influencing interbrand competition might have changed the coffee franchise industry's landscape and thereby widening the gap between exempted brand coffee shops and the rest. (JEL D22, L40, L66)

Multi-Product Pricing and Minimum Resale Price Maintenance

We provide a novel explanation for why manufacturers want to enforce a minimum resale price (min RPM) on retailers. A manufacturer sells her good via a multi-product retailer to final consumers by charging a linear wholesale price. The manufacturer then maximizes her profit through min RPM whenever the Edgeworth taxation paradox (ETP) occurs, that is, whenever the retailer could increase profits by decreasing all prices. Unlike many other justifications for RPM, our ETP-driven explanation for min RPM critically relies on interbrand competition, and it is - at least in the case of linear demand functions - always to the detriment of consumers.

Inter-brand competition in the convenience store industry, store density and healthcare utilization

We investigate the impact of access to convenience stores and competition between convenience store chains on the use of medical care in Taiwan. Using insurance claims from 0.85 million individuals and administrative data on store sales, we find that greater store density and more inter-brand competition reduced expenditures on outpatient medical services and prescription drugs. In support of these findings, we demonstrate that convenience store competition was associated with greater consumption of healthy foods and lower obesity rates. Our estimates suggest that the rise in convenience store competition from 2002 to 2012 reduced outpatient expenditures in Taiwan by 0.44 percent and prescription drug expenditures by 0.85 percent.

Competitive relations in the aftersales market of major appliances in Serbia

The primary goal of this paper is to deepen the knowledge and provide analysis of the basic features of the major appliances aftersales market in the Republic of Serbia. This is relatively large, and for a huge number of consumers significant market, which, according to the available knowledge, was not the subject to more detailed research until now. Therefore, through a combination of survey (desk) and secondary (field) research, a detailed overview of the scope and structure of the major appliances aftermarket was carried out. With the aim to identify potential issues and propose curative to overcome them, an analysis on the competitive relations between the main actors and the factors that predominantly affect the market relations in this segment of the aftersales market was conducted. Bearing in mind the basic characteristics of the primary market in Serbia, it can be concluded that interbrand competition on the major appliances aftermarket is intense, and that significant issues are noticed. A potential problem related to competitive relations in this market segment is reflected in the constraints of intrabrand competition (competition between distributors / servicers / spare parts resellers of the same brand). The manufacturer is in a position to impose restrictions on distributors in respect of the terms of their contracts with authorized services and spare parts dealers, obliging them to install / sell spare parts exclusively from its production. Restrictions of this kind are justified only if they provide higher quality of the after-sales service. Otherwise they represent a serious distortion of competitive market behavior, as this limits the entry of independent spare parts manufacturers and servicers, who can offer spare parts and technical and repairing services of the appropriate quality.

Assessing the Competitive Effects of Surcharging the Use of Payment Mechanisms

The Department of Justice’s theory of liability in its case attacking the non-discrimination provisions in American Express’s merchant acceptance contends that point-of-sale competition on the price of making a purchase with a credit card is an instrument creating economic efficiency. That is, the economy would run more efficiently, and consumers would be better off, if merchants were free to charge variable prices for different types of credit cards. After all, charging different prices for using different types of payment mechanisms appears to be just another form of presumptively positive price competition. The Second Circuit rejected that conclusion, recognizing that in credit card markets competition already occurs at multiple points. American Express must compete to: • convince cardholders to apply for and use its cards; and • convince merchants to accept its cards. The question, the Second Circuit correctly recognized, is whether adding a third type of competition – for cardholders to use the card when merchants pass through their card acceptance fees – would make American Express’s card network more efficient? By prohibiting merchants who accept American Express cards from discriminating against the brand, the card company imposed a unilateral vertical restraint. Such restraints are often deemed to be reasonable under the antitrust laws because they may “stimulate inter-brand competition.” This is because an upstream provider, like American Express, has little interest in reducing its downstream sales. It would only impose a vertical restraint if that restraint efficiently helped it to sell more products. Only when an upstream or downstream provider has market power enabling it to impose restraints that harm consumers by raising price or lowering quality does a vertical restraint violate the antitrust laws. The Department of Justice’s theory postulated that the non-discrimination provisions in American Express’s merchant agreements harmed consumers by effectively requiring merchants to increase their prices to cover higher credit card fees for all customers because merchants could not pass the cost of accepting American Express directly to American Express’s own customers. The Second Circuit acknowledged the potential for consumer harm would exist if American Express charged merchants supra-competitive prices and pocketed the excess as rents. But the court held that the government failed to prove that rivalry on the price consumers pay to use a credit card at the point of sale would increase efficiency in credit card markets. As the Second Circuit explained, credit card markets are two-sided. In order to prove harm to consumer welfare in a two-sided market, an antitrust plaintiff needs to show that a restraint makes the overall system less efficient. That is, do consumers overall pay more for less because of the restraint. A card network like American Express must compete for both cardholders and merchants. One therefore cannot demonstrate that price increases on one side of the market are inefficient without examining how those prices impact competition on the other side of the market. American Express argued that it used increased revenue from the merchant side to offer a better card product to its cardholders and compete more effectively with other card networks, like Visa, for cardholder loyalty. The Second Circuit did not definitively decide whether American Express’s non-discrimination provisions were pro- or anticompetitive. It simple concluded that two-sided market economics made the question more complex than the government plaintiffs acknowledged in trying the case. And based on the record evidence, the court couldn’t tell whether the non-discrimination provisions made the market more or less efficient. Since the plaintiff bears the burden of proving harm to competition, i.e. a reduction in efficiency to the overall market, the government plaintiffs had failed to prove their case. Part I reviews the economics of two-sided markets and provides reasons to conclude that non-discrimination provisions in credit card markets are efficient. Part II explains that two-sided market economics do not guarantee against supra-competitive merchant fees that would make the market less efficient. It then contrasts Visa’s and MasterCard’s fees in the 1990s and early 2000s – which were challenged by merchants in a class action – with American Express’s current fees. It concludes that the factors giving the merchants a plausible case against Visa and MasterCard do not support the government plaintiffs in their case against American Express. Part III addresses a systemic concern expressed in a recent New York Times editorial about how a decision in American Express’s favor might impact the future enforcement of antitrust claims against dominant firms. This Part concludes that those concerns are unfounded because truly dominant firms would be subject to scrutiny under Section 2 of the Sherman Act, and Section 1 vertical restraint cases already require proof of consumer harm no different from what the Second Circuit required in its decision favoring American Express.

Consumer Preferences, Cannibalization, and Competition: Evidence from the Personal Computer Industry

Understanding the degree of cannibalization and competition in online and offline markets is important to firms’ product line designs. However, few empirical studies have measured both effects simultaneously or have examined the factors that determine the extent of cannibalization and competition. In this study, we develop an empirical model to identify cannibalization and competition effects simultaneously in different markets, and further examine the impacts of consumer preferences on these two effects in a single integrated framework. Using data from the U.S. personal computer (PC) industry, we find that the online market exhibits stronger cannibalization and competition than the offline market. Both effects are significantly influenced by consumers’ search behaviors and brand preferences. Specifically, more active consumer search not only intensifies inter-brand competition but also amplifies intra-brand cannibalization. In addition, search has a higher impact on cannibalization than competition. Stronger consumer brand preference mitigates inter-brand competition, but its effect on intra-brand cannibalization varies for different consumer segments. In markets consisting of more high-end consumers, the intra-brand cannibalization increases with consumer brand preference, while, in contrast, in markets consisting of more low-end consumers, the intra-brand cannibalization decreases with consumer brand preference. The differences in consumer search and brand preference explain a significant fraction of the variations in both cannibalization and competition between different PC markets.

GTE Sylvania and Interbrand Competition as the Primary Concern of Antitrust Law

Footnote 19 of the landmark U.S. antitrust decision in Continental T.V. v. GTE Sylvania, Inc. 433 U.S. 36 (1977) declares that “Interbrand competition … is the primary concern of antitrust law.” We trace the antecedents and influence of this declaration, argue that it is inappropriate, and conclude that it should be abandoned.

The Price Effects of Intra-Brand Competition in the Automobile Industry: An Econometric Analysis

Cars are expensive and most consumers know to shop dealers for the best prices. Yet, there is little to no empirical evidence on the price effects of intra-brand competition among different dealer franchises for the same automobile model. In this paper, using large samples of transactions for ten of the most popular new cars purchased in the state of Texas for the years 2011, 2012, and 2013, we estimate the effects of intra-brand competition on new car prices. Intra-brand competition is measured as the distance (in miles) to the nearest same-brand dealer. Significantly, for all but one automobile model we consider in our empirical analysis, we find that intra-brand competition does, in fact, lower new car prices for consumers. For the popular Honda Accord, for example, increasing the distance between Honda dealerships by thirty miles raises the price paid by consumers by about $500. Given that retail margins on auto sales are quite small (about 6% on average), the price reductions resulting from intra-brand competition are substantial relative savings for new-car consumers. Moreover, we find that the price effects of intra-brand competition are relatively strong compared to inter-brand competition — at the sample means, moving an intra-brand dealer one mile closer reduces prices by the equivalent of an increase in 35 inter-brand rivals.