We study whether the introduction of a private label could be profitable for retailers and manufacturers. We also investigate if cooperative advertising could be considered a manufacturer’s counterstrategy to the store brand’s harmful effects. The literature that dealt with the issue of private label introduction was mainly concerned with pricing strategies. However, this problem has not been addressed considering other marketing efforts (flyers, displays, etc.). In this paper, we consider a distribution channel formed by one manufacturer and one retailer, and propose a game theoretic model that accounts for marketing efforts for the national brand, in addition to retail prices. Results are found by comparing outputs from three Manufacturer-Stackelberg games: 1- the retailer offers only the manufacturer’s brand; 2- the retailer sells a private label in addition to the national brand; 3- the manufacturer offers a co-op advertising agreement to the retailer. Our findings generalize previous results and show that the private label introduction is profit-improving for both the retailer and the channel although it could harm the manufacturer’s profits. We show however that for a specific range of the retailer’s advertising efficiency and of the price competition intensity, the manufacturer could profit from the private label introduction. Further, our findings suggest that the coop plan is be an efficient counterstrategy for the manufacturer. Our model also predicts that the retailer would accept the implementation of the coop plan only if the national brand competes strongly with the private label.
Published March 2004 , 31 pages