Competing with channel partners: Supply chain conflict when retailers introduce store brands

Private-label products are of increasing importance in many retail categories. While national-brand products are designed by the manufacturer and sold by the retailer, the positioning of store-brand products is under the complete control of the retailer. We consider a scenario where products differ on a performance quality dimension and we analyze how retailer–manufacturer interactions in product positioning are affected by the introduction of a private-label product. Specifically, we consider a national-brand manufacturer who determines the quality of its product as well the product's wholesale price charged to the retailer. Given the national-brand quality and wholesale price, the retailer then decides the quality level of its store brand and sets the retail prices for both products. We find that a manufacturer can derive substantial benefits from considering a retailer's store-brand introduction when determining the national brand's quality and wholesale price. If the retailer has a significant cost disadvantage in producing high-quality products, the manufacturer does not need to adjust the quality of the national-brand product, but he should offer a wholesale price discount to ensure its distribution through the retailer. If the retailer is competitive in providing products of high-quality, the manufacturer should reduce this wholesale price discount and increase the national-brand quality to mitigate competition. Interestingly, we find the retailer has incentive to announce a store-brand introduction to induce the manufacturer's consideration of these plans in determining the national-brand product quality and wholesale price. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010