Do private labels increase retailer bargaining power?

Like any new product, private label entry increases competition within a category leading to downward pressure on both wholesale and retail prices. But, given the higher margins for private labels and potential bargaining benefits for retailers, they have incentives to help private labels gain market share. The paper addresses two questions: First, do private labels enhance a retailer’s bargaining power with respect to manufacturers? Second, given the higher profitability and potential increase in bargaining power, does the retailer strategically set retail prices to favor and strengthen the private label? We find support for the “bargaining power” hypothesis, but qualified support for the “strategic retailer pricing” hypothesis. Retailers gain bargaining power through lower wholesale prices on imitated national brands. But the gain is greater in niche categories than in mass categories, suggesting that niche national brands with limited “pull” power lose greater bargaining power. In terms of strategic pricing, the retailer, on initially introducing the private label, strategically sets prices to help private labels gain market share in high volume mass market categories. But retail prices revert to the category profit maximizing price after a year when the private label gains a stable market share.     

Store Brand Quality and Retailer’s Product Line Design

This study analyzes a retailer’s store brand quality decision in vertically differentiated product categories. We analyze a game theoretic model composed of one or two national brand manufacturers and a retailer, who strategically chooses the quality level(s) of its store brand(s) relative to the well-established national brand position(s) to maximize its category profit. Our analysis reveals that the nature of a retailer’s store brand quality positioning is quite different from the manufacturer’s national brand positioning decision, and that the best position for a store brand is not “as close to a national brand as possible” as previous studies suggest. Instead, the optimal quality position of each store brand is remarkably sensitive to the distribution of consumers’ willingness-to-pay. In particular, the relative proportions of quality sensitive consumers and price sensitive consumers determine the balance of three key strategic forces — the market expansion force, the retail margin force, and the consumer profitability force, leading to different optimal product line designs for store brands across different category environments. Interestingly, against multiple incumbent national brands, the retailer’s optimal product line design includes a store brand positioned at the highest quality level in the category only if most consumers are moderately quality conscious. We also analyze the implications of national brands’ brand equity for retailers’ store brand strategy.     

Effect of strategy,structure and performance variables on store brand market share

The results obtained by store brands in a large number of markets have been favoured by a set of factors. Prominent among these factors are the actions by manufacturers and distributors on price and differentiation, market competition at both a manufacturer and a retailer level, and the economic-financial results of the latter for the product categories in which they work with a store brand. This research presents an explanatory fixed effects panel model of the market share of these brands that shows clearly the influence of the variables of competitive strategy, structure and performance. The study is applied to the Spanish market for 50 consumer product categories over 5 years, from 1996 to 2000.     

Retailer Heterogeneity,Intra-Brand Competition and Social Welfare

This paper considers a model where a manufacturer sells its product to consumers through competitive retailers who are heterogeneous in marginal distribution costs and geographic locations. We study the welfare implications of resale price maintenance (RPM), which eliminates the intra-brand competition. We show that with RPM, the manufacturer can make more profit at the cost of the consumers. RPM helps the high-cost retailers to stay competitive in the market, and therefore increases the total distribution cost of the society. We suggest that antitrust authorities should be concerned when intra-brand competition is lessened.     

THE IMPACT OF ORDER FULFILLMENT SERVICE ON RETAILER MERCHANDISING DECISIONS IN THE CONSUMER DURABLES INDUSTRY

Historically, manufacturers held the upper hand in consumer goods supply chain relationships. There has been a pervasive shift of power to retailers over the past 20 years, however, ushering in an era of waning consumer loyalty to manufacturers' brands and increasing loyalty to retailers. While there is extensive research focusing on the manufacturer‐consumer relationship, retailers' increased ability to influence consumer purchases suggests that manufacturers should understand not only consumer perceptions of delivery service, but also retailer perceptions. We incorporate social network theory to examine the manufacturer‐retailer‐consumer linkages in the consumer durables industry, with the emphasis on the retailer in the role of the “broker” (Burt 1992). Specifically, we examine whether retailer perceptions of a manufacturer's order fulfillment service (OFS) positively impacts retailer perceptions of the manufacturer's brand, the importance of the product, and the likelihood of the retailers' salespeople to recommend the product to consumers. The research bridges OFS and retailer purchase behavior in a consumer durables industry characterized by high levels of consumer involvement, brand presence, and personal selling.     

Empirical investigation of channel reactions to brand introductions

We investigate how incumbent manufacturers and retailers alter their pricing behavior in response to new product introduction. In performing our analysis, we need to be cognizant of the fact that the observed price changes can be due to entry-induced changes in a) demand conditions or b) costs or, on the other hand, to the competitive behavior of c) manufacturers and/or d) the retailer. In order to separate these four changes, we posit that manufacturer and retailer pricing is an outcome of maximizing a combination of shares and profits. This enhanced objective function allows us to measure competitive conduct benchmarked as less or more competitive than under the Bertrand-Nash framework. Our empirical analysis is based on the toothpaste category for the time period January 1993–February 1995. During this period, there were three brand introductions in two rounds of entry. Using the estimates from the demand and the supply model, we compute the changes in the retail and wholesale prices that are attributable to changes in demand conditions, manufacturer and retailer competitive conduct, and cost changes. These results support our conjecture that inferring the change in conduct solely based on a change in observed prices is likely to be erroneous. For the first new brand entry, we find that the brand introduction did not significantly increase competition between manufacturers. As a result, the balance of channel power between the manufacturers and the retailers remained unaltered. Both retailer and manufacturer profit margins increased after the first entry. However, subsequent to the second entry, retailer share of channel profits increased at the expense of the manufacturers; manufacturers even saw a decline in their absolute profit margins. We believe that this research will provide insight for manufacturers and retailers regarding how the various channel participants are likely to react to new product introduction. Furthermore, policymakers interested in understanding competitive reactions to new product introduction should find this research useful.     

A product-centric data mining algorithm for targeted promotions

Targeted promotions in retail are becoming increasingly popular, particularly in UK grocery retail sector, where competition is stiff and consumers remain price sensitive. Given this, a targeted promotion algorithm is proposed to enhance the effectiveness of promotions by retailers. The algorithm leverages a mathematical model for optimising items to target and fuzzy c-means clustering for finding the best customers to target. Tests using simulations with real life consumer scanner panel data from the UK grocery retailer sector show that the algorithm performs well in finding the best items and customers to target whilst eliminating “false positives” (targeting customers who do not buy a product) and reducing “false negatives” (not targeting customers who could buy a product). The algorithm also shows better performance when compared to a similar published framework, particularly in handling “false positives” and “false negatives”. The paper concludes by discussing managerial and research implications, and highlights applications of the model to other fields.     

Do market characteristics impact the relationship between retailer characteristics and online prices?

We propose that market characteristics interact with retailer characteristics to determine online prices. The retailer characteristics examined include—service quality of a retailer, channels of transaction provided by a retailer and the size of a retailer. The market characteristics capture the level and nature of competition, and the price level of a product. We utilize a Hierarchical Linear Model (HLM) framework for capturing and testing the proposed interactions. The better fit between the model and the online market structure is reflected by a twenty-five percent increase in explainable price dispersion over results from comparable studies. Our study demonstrates that while retailer characteristics do impact online prices, this influence is significantly enhanced or diminished by the accompanying market characteristics.     

Compete in Price or Service?—A Study of Personalized Pricing and Money Back Guarantees

Retailers use both pricing and service strategies to respond to intensified competition. Here we develop a duopoly model to investigate the impact of the increasingly popular personalized pricing strategy (PPS) and the widely used Money Back Guarantee (MBG) customer returns policy. We consider two retailers who differ in customer satisfaction rates. Each retailer chooses a pricing strategy, PPS or uniform pricing, and a product return strategy, MBG or ‘no returns.’ We show that both PPS and MBG are dominant strategies, but their impact on retailers’ prices and profits are different; while PPS intensifies price competition and may lead to a prisoner’s dilemma in which both retailers may lose profit, MBG mitigates price competition and may result in a Pareto improvement in both retailers’ profits. Both PPS and MBG increase the size of the overall market, but not the total duopoly profit. The total customer surplus and social welfare may increase under either strategy. In addition, we obtain some interesting observations as to how our results may change if the product quality/customer satisfaction rate is endogenously chosen in the duopoly. Some of our findings are in contrast to related results reported in the literature.     

Cross-channel free-riding consumer behavior in a multichannel environment: An investigation of shopping motives,sociodemographics and product categories

Cross-channel free-riding, in which consumers use one retailer′s channel to prepare a purchase and then switch to another retailer′s channel to purchase, can substantially erode profit margins. This research aims to understand such free-riding from a consumer empowerment perspective, investigating shopping motives and sociodemographic covariates, as well as how this behavior might differ across product categories. A survey study of decision-making behavior shows that cross-channel free-riders mainly seek to fulfill price comparison, convenience and flexibility needs. The likelihood of free-riding is higher when consumers adopt cross-channel rather than single-channel behavior, which highlights a negative outcome of multichannel retailing. The likelihood of cross-channel free-riding differs across products but not sociodemographic covariates. The findings can be used to develop recommendations for managing retention strategies.     

Developing a framework to improve retail category management through category captain arrangements

Manufacturers and retailers have divergent profit objectives. A manufacturer wants to maximize the profits of its own brands. The retailer, on the other hand, wants to maximize the profit of the entire product category. In spite of these apparently diverging profit objectives, both manufacturers and retailers are increasingly realizing that profit margins of both can be increased through cooperation rather than confrontation. Category management is one such cooperative strategy that often involves the appointment of a leading manufacturer as the “category captain”. A category captain advises the retailer on the best way to price, display, and promote products in a category, including those of the competitors. This arrangement, therefore, ensures retail efficiency but raises doubt about possible misuse of power by the category captain to circumvent fair competition. In this paper, we outline the antitrust concerns about this arrangement, and provide a framework that effectively addresses these concerns.     

Consumer evaluations of store brands: effects of store image and product attributes

The importance of store brands has increased. Many products carrying a label that is exclusively available from a specific retailer chain have been introduced in recent years, with varying degrees of success. Retailers appear to pay little attention to the multiple risks associated with adding new product categories to their store labels. We investigate how store image factors and various categories of perceived risk associated with product attributes affect consumer evaluations of store-branded products. A structural model is developed and tested, providing indications of the likelihood of store brand success in various product categories. Research and managerial implications are provided.     

考虑零售商销售努力的双渠道供应链定价策略研究

随着电子商务市场的日益成熟,制造商建设线上直销渠道来适应新的商品销售环境成为趋势。制造商线上直销渠道的建立占领了部分原本属于线下零售渠道的市场份额,对线下零售渠道造成冲击。针对双渠道供应链中的竞争,将零售商销售努力行为考虑在内,通过构建博弈模型分别研究了在集中决策模式和分散决策模式下,制造商与零售商的定价策略。研究发现,在集中决策模式下,线下零售渠道与线上直销渠道之间的价格差异随着两个渠道潜在需求量之间差异的增大而增大,并且两个渠道的最优价格分别与其市场潜在需求成正比。在分散决策模式下,两个渠道的最优价格亦与潜在需求成正比,并且线下零售渠道的最优价格随零售商销售努力程度的增加而增加,线上直销渠道的最优价格随着零售商销售努力程度的增加而减少。     

On manufacturers complementing the traditional retail channel with a direct online channel

With the explosion of the Internet and the reach that it affords, many manufacturers have complemented their existing retail channels with an online channel, which allows them to sell directly to their consumers. Interestingly, there is a significant variation within product categories in manufacturer's use of the Internet as a direct distribution channel. The main objective of this study is to examine the strategic forces that may influence the manufacturer's decision to complement the retail channel with a direct online channel. In particular, we are interested in answering the following questions:

1. Why is it that in some markets only a few firms find it optimal to complement their retail channels with a direct Internet channel while other firms do not?
2. What strategic role (if any), does the direct Internet channel serve and how do market characteristics impact this role?

To address these issues we develop a model with a single strategic manufacturer serving a market through a single strategic retailer. In addition to the focal manufacturer's product the retailer carries products of competing manufacturers. Consumers in this market are one of two types. They are either brand loyal or store loyal. The retailer sets the retail price and the level of retail support, which impact the demand for the manufacturer's product. The retailer's decisions in turn depend on the wholesale price as well as the Internet price of the product if the manufacturer decides to complement the retail channel with an online channel. Our analysis reveals that the optimality of complementing the retail channel with an online channel and the role served by the latter depends critically upon the level of support that the retailer allocates to the manufacturer's product in the absence of the online channel. The level of support allocated by the retailer, in the absence of the online channel, depends upon the retail margins on the manufacturer's product relative to that on rival products in the product category. When the size of the brand loyal segment is small relative to the size of the store loyal segment then in the absence of the online channel, the manufacturer can lower wholesale price and enhance retail support, especially when the retail margins on the rival products are low. In contrast, when the size of the loyal segment is large and the retail margins on rival products are high the manufacturer will find it more profitable to charge a high wholesale price even if that induces the retailer to extend low levels of support. If the manufacturer decides to complement the retail channel with an online channel, some consumers who would have purchased from the retailer might prefer to purchase online. Our analysis reveals that when consumers' sensitivity to price differences across the competing channels exceeds a certain threshold it is not optimal for the manufacturer to complement the retail channel with an online channel. However, this price sensitivity threshold itself depends upon product/market characteristics, suggesting that manufacturers seeking to complement their retail channels with an online channel should look beyond the nature of threat the online channel poses to the retail channel in devising their optimal distribution strategies. When the retail margins on rival products are sufficiently small, complementing the retail channel with an online channel when optimal allows the manufacturer to price discriminate and enhance profits. In contrast when retail margins on rival products are sufficiently high, complementing the retail channel with an online channel serves to enhance retail support. We also identify market conditions under which profits of both the manufacturer and the retailer are greater with the online channel than that without it. This is particularly interesting since the online channel competes with the retail channel.     

Decomposing the effect of advertising: What happens in the retail channel?

The diverging interests of manufacturers and retailers famously give rise to the double marginalization problem but have consequences far beyond pricing. Advertising is another marketing instrument that is under the control of the manufacturer but its ultimate effect on consumer demand also depends on retailers’ pricing decisions. We decompose the effect of advertising in the channel and highlight an additional route through which advertising affects sales, namely via the changes in the retail price that a strategic retailer makes in response to changes in demand following manufacturer advertising. The total demand effect of advertising thus comprises the direct effects of advertising on market shares, and the indirect effects coming through adjustments that the retailer makes to the in-store prices of all the brands in a given product category in response to the shifted demand due to advertising. We match advertising data for four different categories (both food and non-food) to store-level scanner panel data, which also include information on wholesale prices. Controlling for wholesale prices, we establish in a reduced-form model that the retailer reacts to manufacturer advertising by changing retail prices instead of simply imposing a constant markup on the wholesale price. To further explore the role of the strategic response of the retailer in a systematic fashion and quantify the effects derived in the decomposition, we estimate a discrete-choice model of demand and determine the magnitude of the direct and indirect effects. We find that the indirect effect of advertising through retailer prices is about half the size of the direct effect, and thus substantively affects advertising effectiveness.     

Retail services and firm profit in a dual-channel market

With the rapid development of the Internet, many manufacturers nowadays use online technology to engage in direct sales. The mix of retailing with a direct channel adds a new dimension of competition and complementarity to a product's distribution channels. Our model focuses on the strategic role played by the retail services in a dual-channel competitive market. The manufacturer uses a direct channel as an effective tool to motivate the retailer to improve its retail services and profits from it. While operated by the manufacturer to motivate retailer to perform more effectively from the manufacturer's perspective, the direct channel may not always be detrimental to the retailer because the retailer can obtain a lower wholesale price from the manufacturer and a higher sales volume from the improved retail services. In our research, our results suggest that the improved retail services effectively alleviate the channel competition and conflict and improve the supply chain performance in a competitive market.     

When Ethical Transgressions of Customers Have Beneficial Long-Term Effects in Retailing: An Empirical Investigation

The conventional wisdom, grounded in deontological ethics, is that retailers should extinguish unethical customer behavior. However, there exists an opposing teleological view that unethical behavior may be tolerated if its ultimate consequences are beneficial for all stakeholders. This is supported by a survey of retail managers conducted by the authors that revealed over 80% of the respondents are inclined to tolerate unethical customers whose actions have beneficial effects. The primary goal of this research is to investigate the boundaries of this teleological perspective, that is, whether ethical transgressions that appear to have negative short-term consequences for the retailer and other ethical customers can have beneficial longer-term consequences for all parties. We examine this question empirically with a longitudinal dataset, covering seventy weeks and over 48,000 accounts, from a popular Swiss online retailer. We focus on increased revenues and customer engagement as the benefit for the retailer. Our results show that customers registering multiple accounts in violation of the retailer’s policy comprise fewer than 11.5% of accounts, yet generate more than 27.6% of the retailer’s revenue. Specifically, their behavior leads to higher retailer revenues and greater engagement by other customers in the long-run. We discuss the implications of this insight for retailing managers as well as scholars.     

Hit and Run or Sit and Wait? Contestability Revisited in a Price-Comparison Site-Mediated Market

The price-comparison site, with its (near-)zero sunk costs of entry, would appear to approximate the “almost perfectly contestable market” envisaged by the contestability theorists where “hit-and-run” entry was conjectured to constrain sellers to zero-profit outcomes. We investigate hit and run using a unique unbalanced panel of 295 digital-camera markets mediated by NexTag.com. We find, however, in line with Farrell (1986a)’s prediction, a bifurcation of strategies with low reputation/smaller participants favouring a hit-and-run strategy involving lower entry prices and shorter forays into the market than their high reputation/larger rivals. Furthermore, the former entrants induce a much larger price response from low-reputation incumbents, reflecting the more intense rivalry for the price-sensitive consumers willing to eschew retailer reputations.     

Expanding to direct channel: Market coverages as entry barrier

A direct marketer can be either a manufacturer selling directly to the final consumers or a retailer that sells an assortment of products from multiple manufacturers. From a manufacturer's point of view, expanding to an online direct channel seems very attractive because intermediaries can be bypassed in reaching final consumers, while the Internet has substantially lowered the entry barrier. With the rapid diffusion of electronic commerce, numerous manufacturers have been considering a direct online channel as an alternative or a supplement to existing retailer channels. However, we observe in the real market that not many manufacturers are fully engaged in online retailing. One major factor frequently mentioned is the conflict with existing dealers who will not be pleased with a manufacturer's attempt to cannibalize their sales. This paper attempts to provide another explanation by comparing theoretical market coverage of manufacturers in a direct channel and a channel with intermediaries. We show that the direct channel can support fewer firms than the traditional retailer channel does, which becomes an effective entry barrier to latecomers. In equilibrium, the products are positively but finitely differentiated in their qualities, and the top two quality tiers would capture more than 75% of the direct channel's market potential (i.e., the “finiteness property”). Thus latecomers would find it difficult to gain a substantial market share against the existing pioneers in the competitive direct market unless they can find other meaningful ways to differentiate horizontally. The sales data of the online retail industry supports our finding.     

Brand and quality effects on introduction of store brand products

This paper considers a supply chain with a single manufacturer selling a national brand product via a single retailer. The retailer has the option to introduce a product under his own brand into the market with the same functionality as the national brand product. We simultaneously consider the consumer bases of the national brand and store brand along with consumers' willingness to pay for quality and the supply chain control (centralized vs. decentralized). By analyzing the game-theoretic models, we offer managerial insights about the influences of brands' consumer bases on the quality and pricing decisions of the retailer, and on the manufacturer's willingness-to-collaborate when the retailer introduces the store brand product. We find that, although it is usually easier for the retailer to introduce a product under a store brand with a large consumer base, doing so with manufacturers of well established national brands can be difficult, when the retailer often has to greatly mark down his store brand product's quality and price. We also find that a store brand product with a small consumer base shall be launched only when the supply chain is switched to a centralized control and when the manufacturer's national brand has a large consumer base. These important findings offer guidance to both national brand manufacturers and retail store managers regarding the launch of store brand products.