Store-Brand Introduction and Multilateral Contracting

M&SOM, Forthcoming

40 Pages Posted: 11 Sep 2020 Last revised: 17 Mar 2021

See all articles by Quan Zheng

Quan Zheng

University of Science and Technology of China - School of Management

Hongseok Jang

A.B. Freeman School of Business, Tulane University

Xiajun Amy Pan

University of Florida - Warrington College of Business Administration

Date Written: August 1, 2020

Abstract

Problem Definition: We explore the impacts of store brand (SB) introduction on multilateral contracting in vertical supply relationships that involve two upstream national brand manufacturers (NBMs) selling through a common retailer. Two different information structures are scrutinized: simultaneous (secret offers) versus sequential contracting (public offers), essentially different timing by which the NBMs contract with the retailer.

Academic/Practical Relevance: SB products are prevalent nowadays; however, the market shares in different categories vary substantially, from negligible sales (e.g., alcoholic beverages) to more than half of the total sales (e.g., milk). As retailers encroach upon the NBMs’ product market, their relationships are reshaped accordingly. Thus, investigating whether SB introduction would overturn the conventional wisdom about multilateral contracting is pertinent.

Methodology: Non-cooperative game theory.

Results: We identify a boundary equilibrium, where the sale of the SB is negligible but its presence enables the retailer to intensify the upstream competition and elicit better wholesale contracts. We show that this equilibrium tends to occur in a wider region under sequential contracting than under simultaneous contracting. In the boundary equilibrium of sequential contracting, the NBM could entail a first-mover advantage, a stark contrast to the second-mover advantage in the non-boundary equilibrium. Further, as opposed to the uniqueness of sequential contracting, we characterize a continuum of boundary equilibria under simultaneous contracting such that symmetric NBMs may even set asymmetric wholesale prices so as to drive the SB out of the market.

Managerial Implications: We provide a rationale for the observed negligible sales of certain SBs and further shed lights on the choice between public and secret offers. Public offers could perform better for the retailer who in turn benefits from information leakage. With public offers, the NBMs’ preference for the leadership could also be reversed for those SBs with negligible sales. Because of the intricate impact of SBs on contracting sequence, these two instruments should be jointly analyzed.

Keywords: Retailing; Store Brand; Channel Management; Contracting Sequence; Non-cooperative Game

Suggested Citation

Zheng, Quan and Jang, Hongseok and Pan, Xiajun Amy, Store-Brand Introduction and Multilateral Contracting (August 1, 2020). M&SOM, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3663002

Quan Zheng (Contact Author)

University of Science and Technology of China - School of Management ( email )

Hefei, Anhui
China

Hongseok Jang

A.B. Freeman School of Business, Tulane University ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Xiajun Amy Pan

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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