Supply chain interactions due to store-brand introductions: The impact of retail competition

Store-brand products are of increasing importance in retailing, often causing channel conflict as they compete with national brands. Focusing on the interactions that arise in single-manufacturer single-retailer settings, previous research suggests that one main driver of store-brand profitability to the retailer is that it leads to a reduction of the national-brand wholesale price. Under retail competition, the Robinson Patman Act then introduces an interesting trade-off: A retailer that introduces a store brand incurs the associated costs and risks, while sharing this benefit with its competition. We show that the resulting interactions can cause retailers to play “chicken”, either of them preferring a store-brand introduction by the competitor. Such interactions do not arise in channels with a single retailer, as has been the object of most previous research, and we show that some of the key insights derived from single-retailer models fail to hold when retailers compete. We conduct a numeric study, and our findings suggest that retailers are more likely to randomize their store-brand introduction strategies when customers have strong store preferences, and when the retailers’ store-brand products are similar to the national-brand product in terms of customer valuations and production cost.