A dynamic model for advertising and pricing competition between national and store brands

We study the relationship between the pricing and advertising decisions in a channel where a national brand is competing with a private label. We consider a differential game that incorporates the carryover effects of brand advertising over time for both the manufacturer and the retailer and we account for the complementary and competitive roles of advertising. Analysis of the obtained equilibrium Markov strategies shows that the relationship between advertising and pricing decisions in the channel depends mainly on the nature of the advertising effects. In particular, the manufacturer reacts to higher competitive retailer's advertising levels by offering price concessions and limiting his advertising expenditures. The retailer's optimal reaction to competitive advertising effects in the channel depends on two factors: (1) the price competition level between the store and the national brands and (2) the strength of the competitive advertising effects. For example, in case of intense price competition between the two brands combined with a strong manufacturer's competitive advertising effect, the retailer should lower both the store and the national brands' prices as a reaction to higher manufacturer's advertising levels. For the retailer, the main advantage from boosting his competitive advertising investments seems to be driven by increased revenues from the private label. The retailer should however limit his investments in advertising if the latter generates considerable competitive effects on the national brand's sales.

[1]  Philip M. Parker,et al.  Private labels: psychological versioning of typical consumer products , 2004 .

[2]  Mary W. Sullivan,et al.  The Measurement and Determinants of Brand Equity: A Financial Approach , 1993 .

[3]  G. Zaccour,et al.  Could co-op advertising be a manufacturer's counterstrategy to store brands? , 2006 .

[4]  C. Shapiro,et al.  Informative Advertising with Differentiated Products , 1984 .

[5]  Paul S. Richardson.  Are store brands perceived to be just another brand , 1997 .

[6]  Arun K. Jain,et al.  How consumers evaluate store brands , 1996 .

[7]  Kevin Lane Keller,et al.  Understanding retail branding: conceptual insights and research priorities , 2004 .

[8]  Ruth N. Bolton,et al.  An Empirical Analysis of Determinants of Retailer Pricing Strategy , 2004 .

[9]  Jagmohan S. Raju,et al.  The introduction and performance of store brands , 1995 .

[10]  Suresh Sethi,et al.  Generic and Brand Advertising Strategies in a Dynamic Duopoly , 2005 .

[11]  S. Chapman.  Advertising as information , 1999 .

[12]  V. Rao,et al.  Structural Analysis of Competitive Behavior: New Empirical Industrial Organization Methods in Marketing , 2001 .

[13]  Kyle Bagwell,et al.  Coordination Economies, Advertising, and Search Behavior in Retail Markets , 1994 .

[14]  Petr Mariel,et al.  A model of optimal advertising expenditures in a dynamic duopoly , 2001 .

[15]  Ronald T. Wilcox,et al.  Private-Labels and the Channel Relationship: A Cross-Category Analysis , 1998 .

[16]  Georges Zaccour,et al.  Production, Manufacturing and Logistics Retail promotions with negative brand image effects: Is cooperation possible? , 2003 .

[17]  Leonard M. Lodish,et al.  How T.V. Advertising Works: A Meta-Analysis of 389 Real World Split Cable T.V. Advertising Experiments , 1995 .

[18]  Kusum L. Ailawadi.  The retail power-performance conundrum , 2001 .

[19]  Pradeep K. Chintagunta,et al.  Investigating Dynamic Multifirm Market Interactions in Price and Advertising , 1999 .

[20]  Dale O. Stahl,et al.  INFORMATIVE PRICE ADVERTISING IN A SEQUENTIAL SEARCH MODEL , 1993 .

[21]  A. Abouchar.  The Theory of Optimal Multi-Product Output and Pricing under Joint Costs and Variable Technology , 1970, Journal of Political Economy.

[22]  Mark J. Roberts,et al.  An Empirical Analysis of Dynamic, Nonprice Competition in an Oligopolistic Industry , 1988 .

[23]  David A. Soberman,et al.  Research Note: Additional Learning and Implications on the Role of Informative Advertising , 2004, Manag. Sci..

[24]  G. Zaccour,et al.  Equilibrium Pricing and Advertising Strategies in a Marketing Channel , 1999 .

[25]  S. Rubio.  On the Coincidence of the Feedback Nash and Stackelberg Equilibria in Economic Applications of Differential Games , 2002 .

[26]  S. Rubio,et al.  On Coincidence of Feedback Nash Equilibria and Stackelberg Equilibria in Economic Applications of Differential Games , 2006 .

[27]  Pradeep K. Chintagunta.  Investigating the Sensitivity of Equilibrium Profits to Advertising Dynamics and Competitive Effects , 1993 .

[28]  Kenneth R. Deal.  Optimizing Advertising Expenditures in a Dynamic Duopoly , 1979, Oper. Res..

[29]  Naveen Donthu,et al.  An examination of selected marketing mix elements and brand equity , 2000 .

[30]  Guiomar Martín-Herrán,et al.  Shelf-Space Allocation and Advertising Decisions in the Marketing Channel: a differential Game Approach , 2003, IGTR.

[31]  Puneet Manchanda,et al.  Differences in Dynamic Brand Competition Across Markets: An Empirical Analysis , 2005 .

[32]  John Saunders,et al.  Multiproduct Advertising Budgeting , 1990 .

[33]  Stephen J. Hoch,et al.  Why Store Brand Penetration Varies by Retailer , 1997 .

[34]  Jagmohan S. Raju,et al.  Positioning of Store Brands , 2002 .

[35]  Florian Zettelmeyer,et al.  The Strategic Positioning of Store Brands in Retailer–Manufacturer Negotiations , 2004 .