Should leading brand manufacturers supply private label brands to retailers: Calibrating the trade-offs

The consolidation of retailers across markets has considerably altered the competitive dynamics between leading brand manufacturers and retailers. The era in which brand manufacturers dictate the game to compliant retailers is long gone. Nowadays, with more equal negotiation power retailers are no longer just channel partners but rather business partners with whom to build business-to-business relationships. This has become apparent especially since retailers have developed their own private label brands (PLB) and actively seek brand manufacturers to supply them. For brand manufacturers supplying PLB may bring potential benefits but may also harm profits. Thus, this research investigates conditions under which a leading brand manufacturer would be better or worse off in terms of profitability producing PLB for retailers. Using a game theoretic model, we calibrate the trade-offs between the shelf space devoted by the retailer to the manufacturer brand and the amount of profit required from supplying the PLB necessary to counteract cannibalization and to generate profits for the manufacturer, under different levels of uncertainty regarding the availability of alternative suppliers. Calibrating these trade-offs provides brand manufacturers clear guidelines for negotiations with retailers regarding shelf space allocation and wholesale prices to be profitable supplying PLB.     

Vertical contracts in search markets

This paper studies a simple model to underline the importance of consumer search for understanding wholesale contracts between manufacturers and retailers. The model has one manufacturer and two retailers who compete in a homogeneous goods market where the wholesale contract is unobserved by consumers. If the manufacturer is in the position to offer two-part tariffs, the model without search either does not have an equilibrium wholesale contract (if retailers hold passive beliefs) due to the well-known opportunism problem or it is characterized by the absence of a fixed fee (when retailers hold symmetric beliefs). With consumer search, an equilibrium wholesale contract always exists (even if retailers hold passive beliefs) overcoming the opportunism problem and is always characterized by some fixed fee. If the manufacturer offers linear wholesale contracts, the differences between the models with and without consumer search are less pronounced, but remain even if the search cost vanishes. Thus, the vertical contracting literature cannot simply ignore search costs by saying that they are probably small and can therefore be neglected.     

Free Riding and Sales Strategies for the Internet

For many products, Internet sales can free ride off of the promotional effort exerted by brick and mortar retailers, leading manufacturers to attempt to control the availability and pricing of their products over the Internet. We examine three categories of products: fragrances, DVD players, and side-by-side refrigerators. Our evidence suggests that manufacturers that limit distribution in the physical world use various mechanisms to limit distribution online. In particular, these manufacturers generally prevent the sale of their products by Internet retailers that offer deep discounts. Furthermore, manufacturer websites tend to charge high prices, suggesting that manufacturers may internalize free rider issues.     

Lump-Sum Payments and Retail Services: A Relational Contracting Perspective*

How should manufacturers motivate their retailers to provide customer services? The vertical restraints literature tells us that retail competition distorts service incentives in the short run. We consider how repeated interaction mitigates this problem, and particularly how a manufacturer can provide service incentives with discretionary lump-sum payments. We find that these payments may allow the manufacturer to sustain optimal service levels even if retailers are very impatient. We also show that banning reverse lump-sum payments may deprive consumers of the chance to enjoy high-quality services, and thereby reduce their welfare.     

ASSESSING THE IMPACT OF RETAILER STORE BRAND PRESENCE ON MANUFACTURER BRANDS IN AN EQUILIBRIUM FRAMEWORK*

This article assesses the impact of retailer store brand products on manufacturer brand prices, profitability and consumer welfare in Boston's white fluid milk market. Estimates from a random coefficients logit demand model are used to specify and test a set of pricing games. Under the selected model, milk manufacturers are Stackelberg leaders to retailers, and store brand milks are procured by retailers at cost. The model is used to investigate counterfactual markets without retailer store brand milks. Counterfactual Simulation results indicate that store brands increase channel profits, retailer profits and consumer welfare, while having mixed effects on equilibrium retail prices.     

Non-Exclusive Dealing with Retailer Differentiation and Market Penetration

Retailer differentiation exists in most industries and gives manufacturers an incentive to contract with different retailers to penetrate a market. This paper analyzes the impact of this penetration effect on vertical contract exclusivity in an oligopolistic model with differentiated retailers. In the model, manufacturers endogenously choose contract types and negotiate with retailers on wholesale prices. We show that, when the penetration effect is sufficiently strong, non-exclusive contracts lead to higher profits for the manufacturers and retailers. The model is applied to an example with logit demand, which shows that both manufacturers choosing the non-exclusive contracts is a dominant-strategy Nash equilibrium even though they may both be better off under exclusive contracts when the products have high quality or low costs.     

Resale price maintenance for supply chains distributing products with demand uncertainty

This paper explores the economic roles of resale price maintenance (RPM) in supply chains for a specific product, when consumers have taste heterogeneity and the manufacturer faces demand uncertainty. Two transaction schemes within supply chains are compared: (1) RPM, and (2) decentralized pricing in a competitive market environment. With decentralized pricing, a manufacturer loses the incentive to produce a product in categories where the probability that the manufacturer fails to design the product as suitable to public tastes of consumers is high. However, RPM resolves the problem and induces the manufacturer to supply the good, bringing positive surplus to consumers.     

Strategic information sharing between competing retailers in a supply chain with endogenous wholesale price

This paper introduces a new motivation for information sharing in decentralized supply chains—as a mechanism to achieve truthful information sharing and to reduce signaling costs. We study a two-echelon supply chain with one manufacturer selling a homogenous product to n price-setting competing retailers. Each retailer has access to private information about the potential market demand, and the retailers have an ex-ante incentive to share this information with each other and to conceal the information from the manufacturer. However, without a mechanism that induces the retailers to truthful information exchange as their strategic choice, no information can be exchanged via pure communication (cheap talk). To overcome this obstacle, two signaling games are analyzed: in the first game, information is shared truthfully among the retailers; in the second game, information is also shared truthfully with the manufacturer. We show that under some conditions sharing information with the manufacturer results in a higher profit for the retailers.     

RESALE PRICE MAINTENANCE AND INTERLOCKING RELATIONSHIPS*

Dampening of interbrand as well intrabrand competition is often advanced to justify per se illegality of RPM. We analyze this argument in a context where rival manufacturers distribute their products through the same competing retailers. We show that RPM indeed limits the exercise of competition at both levels and can generate industry‐wide monopoly pricing. The impact on prices depends on the extent of potential competition at either level as well as on the parties' influence in determining the terms of the contracts. Our analysis sheds a new light on ongoing legal developments and is supported by recent empirical studies.     

Transaction cost implication of private branding and empirical evidence

Branding and transaction cost economics represent two research streams that rarely cross paths in the literature. In this study, I explore the transaction cost implication of private branding, a practice whereby products supplied by unaffiliated manufacturers are sold under private brands owned by retailers. The main thesis is that private branding can preempt a special case of asset specificity called brand specificity, where retailers also invest in the marketing of an outsourced product, but subsequent reputation effects (positive or negative) are specific to the manufacturer who brands the product. Retailers, thus, will not be fully motivated to optimize their investment in product marketing unless they take over the branding right. With potential barriers to private branding being controlled, data obtained from a national chain reveal that the retailer deploys its marketing resources according to the branding status of a product, implying that private branding can deflect the transaction cost of solving the brand specificity problem. The results offer new theoretical insights into branding and transaction cost analysis. This efficiency‐based approach to private branding also provides practitioners with useful guidelines for crafting a branding strategy that will facilitate cooperation between manufacturers and retailers. Copyright © 2009 John Wiley & Sons, Ltd.     

Price authority and information sharing with competing supply chains

We characterize the degree of price discretion that two competing manufacturers grant their retailers in a framework where demand is uncertain and privately observed by the retailers, while manufacturers only learn it probabilistically. In contrast with the consolidated vertical contracting literature, we assume that manufacturers cannot use monetary incentives to align the retailers’ incentives to pass on their unverifiable distribution costs to consumers. Our objective is to study how, in this context, an information-sharing agreement according to which manufacturers share their demand information affects prices, profits and consumer surplus. While equilibria with full price delegation never exist, regardless of whether manufacturers share information, partial delegation equilibria may exist with and without the exchange of information. These equilibria feature binding price caps (list prices) that prevent retailers from passing on their distribution costs to consumers, and are more likely to occur when manufacturers exchange demand information than when they do not share this information. Manufacturers profit from exchanging demand information when products are sufficiently differentiated, and retailers’ distribution costs are high enough. Yet, expected prices are unambiguously lower when manufacturers exchange demand information than when they don’t, making the information exchange beneficial to consumers.     

Quasi-Partnerships in Distribution

This paper concerns the sale of a vertically differentiated good by a manufacturer to retailers that have market power when reselling to consumers. The contractual relationships between the manufacturer and individual retailers are characterized as “quasi-partnerships,” reflecting the ongoing and multi-dimensional nature of such relationships. Contractual terms are predicted by the Nash bargaining solution and are distinguished from those in an ordinary bilateral monopoly because they make allowance for competing, vertically differentiated brands. The model predicts that differences in retailers’ ability to promote the manufacturer’s brand induce prices that vary systematically with the manufacturer’s market share of retailers’ sales.     

基于顾客比价行为的双渠道供应链定价决策研究

本文在考虑顾客比价行为的前提下,构建一个制造商和一个零售商组成的二级供应链系统,分析比价顾客的比例对于制造商与零售商在分散决策和集中决策模式下供应链整体利润、销售价格的变化,并通过算例验证研究结论。结果表明,随着比价顾客比例的提高,零售商销售价格上升,顾客体验价值上升,供应链整体利润在集中决策模式下较高,且呈上升趋势。     

闭环供应链回收渠道与成本分摊机制研究

本文基于废旧产品的回收再制造,研究了零售商和制造商组成的闭环供应链。作者分别建立零售商回收和制造商回收两种模型,运用逆向归纳法求解分析不同模型对各成员利润的影响,指出成本分摊机制可以使闭环供应链达到协调。最后,选取合理的数据对结论进行验证,并就需求对价格的敏感系数及分摊比例等参数对回收率和利润值的影响做了分析。结果表明：一定条件下,制造商负责回收废旧产品要优于零售商负责回收;成本分摊契约可以提高回收率和各主体的利润值。     

Manufacturer's retailer dependence: A private branding perspective

With the recent increase in the power of major retailers through consolidations, the world of brands has divided in two categories: national brands belonging to manufacturers and private brands belonging to retailers. While national brands are well studied in the literature, there is a dearth of studies on private brand phenomenon particularly from a manufacturer's point of view as opposed to that of retailers and consumers. To address this gap, we explore the antecedents and consequences of a manufacturer's private brand retailer dependence with a focus on the manufacturer's relationship with retailers. Drawing on the Resource Dependence Theory and Transaction Cost Economics, we examine various products and market characteristics as potential antecedents of a manufacturer's private brand retailer dependence while adopting private brand sales growth and returns from private brand production as outcomes using a sample of 153 South Korean manufacturers currently involved in private brand production. The results show that the private brand retailer dependence of a manufacturer leads to private brand sales growth directly and returns from private brand production indirectly through private brand sales growth, and has a negative effect on return from private brand production directly. Furthermore, product characteristics, such as product innovativeness through collaboration with retailers and search goods, and market characteristics, such as high retailer power and knowledge specificity of a retailer, increase a manufacturer's private brand retailer dependence and, therefore, private brand sales growth. The theoretical and managerial implications of the findings are discussed at the end.     

Resale Price Maintenance: An Economic Analysis of its Anticompetitive Potential

A decade ago, Leegin overruled Dr. Miles and subjected RPM to rule-of-reason treatment, under which the potential for anticompetitive conduct should be analyzed (rather than automatically assumed to be present). In its Leegin decision, the Supreme Court identified four ways in which RPM could be used to retard competition and consequently reduce consumer welfare: The first two involve the well-known concerns that RPM could be used to support either a manufacturer cartel or a dealer cartel; the last two involve unilateral conduct designed to foreclose entry or hinder smaller rivals. In this paper, we analyze these potentially harmful uses of RPM. We conclude that RPM does not pose a substantial anticompetitive threat.     

Strategically releasing control: Navigating the complexities of enabling category captains

Many retailers seek growth by strategically enabling a category captain to manage a category on their behalf. Past research assesses the efficacy of category captaincy from a retailer perspective, with results showing effective categorycaptain arrangements depend on the respective abilities of actors to effectively operate in such a network structure. Less is known about what and how manufacturers become successful captains or how challenger manufacturers unseat an incumbent captain. With this research, we contribute to the growing but still small literature on category captaincy in two main ways. First, we re-orient the focus from the retailer to the manufacturer (both captain and non-captains) to uncover the enabling strategies and underlying capabilities captains and non-captains require when operating in category captaincy networks. Second, we contextualize the captaincy lifecycle in terms of three stages; consideration, captaincy, and renewal. Drawing on interviews with retailers, category captains, and non-captains from six sectors we develop propositions whereby capabilities are contingent on actor goals across the captaincy lifecycle. In so doing, we extend existing research by identifying the capabilities necessary for different actors to gain benefits from category captaincy arrangements.     

Mobile channel and channel coordination under different supply chain contexts

The paper proposes different supply chain contexts where one manufacturer sells the same product to two retailers, one traditional and one online. The first context is when two retailers are distinct entities and the second context is when a dominant manufacturer owns and controls the traditional retailer. In each context, we study a no cooperation scenario versus various cooperation strategies (namely the minimum pricing strategy, the whole channel price, and the revenue sharing cooperation). Besides, we investigate the use of a dual channel by the online retailer via a mobile channel and a computer channel. The online retailer could use the same price online or a price differentiation (called also personalized pricing) depending on where the purchase is done. Our results show the crucial role of the product compatibility to the web and the mobile baseline incremental sales in influencing the performance of each channel member.     

Buyer power and exclusion in vertically related markets

Suppliers and consumer organizations have become increasingly concerned by the build-up of buyer power of retailers in many markets. A major concern is that strong retailers will abuse their power to exclude products and rival retailers from the market to be able to increase prices to consumers. As a consequence, remedies to limit buyer power are discussed and implemented in many countries. In this paper we compare the incentives for exclusion, and the effect on consumers prices, under both buyer and seller power. We study a model with a dominant upstream manufacturer and a competitive fringe of producers offering their products to two differentiated downstream retailers. We compare the equilibrium outcome of this model when i) the dominant supplier holds all the bargaining power, and (ii) the retailers have all the bargaining power. We show that full or partial exclusion of either the competitive product or downstream retailers occurs when inter and intrabrand competition are strong. This is true both under seller and buyer power. However, in contrast to the received literature, we find that buyer power weakly enhances welfare compared to seller power because buyer power will lead to both more product variety (less exclusion) and lower retail prices.     

Manufacturers’ reliance on channel intermediaries: Value drivers in the presence of a direct web channel

Channel intermediaries constitute a key marketing asset, enabling manufacturers to reach out to and serve end-users or customers. The manufacturer-intermediary relationship has to create value for and deliver it to the end-user. In this process manufacturers and intermediaries add value to each other. Drawing upon the Governance Value Analysis (GVA) framework, this paper focuses on the manufacturer's perspective of value contributed by themselves and their intermediaries. The research setting is a multi-channel context where the manufacturer employs a direct web site for marketing in addition to the intermediary channel. We find that relational investments in intangible assets such as training and operating procedures by manufacturers in intermediaries, and intermediary investments in their end-customer relationships, increase manufacturers’ reliance on intermediaries even when the manufacturer has its own direct web site. Further, regardless of having their own website, manufacturers’ reliance on intermediaries increases with the web competence of their intermediaries. In addition, we find that, to the extent that the manufacturer's direct web site can perform the same functions as the intermediaries, manufacturer reliance on its intermediaries decreases. Surprisingly, manufacturers whose web sites have e-commerce transaction facility, rely on intermediaries more than those manufacturers whose web sites do not have this facility. Finally, the study finds that manufacturers’ reliance on intermediaries has increased over time despite their direct web channels, probably due to market growth opportunities. Overall, our study findings showcase the complementary role played by manufacturers’ web sites and intermediaries in serving their end customers in growth markets.