Substitution effect of retailer store brand and manufacturer encroachment

Abstract

We study manufacturer encroachment in a supply chain in which there is partial substitution between the re- tailer’s store brand and the manufacturer’s national brand. Manufacturer encroachment and the store brand’s substitution effect lead to several implications for the manufacturer and the retailer. We use a game-theoretic model to analyze the optimal decisions of the manufacturer and the retailer. In the absence of a store brand, it is well established that the retailer can benefit from manufacturer encroachment. However, our analysis re- veals that (i) the retailer will not benefit from manufacturer encroachment when the national brand and the store brand are close substitutes, (ii) the substitution effect from the store brand can stifle the manufacturer’s direct selling quantity and can impede the manufacturer encroachment, (iii) the coexistence of manufacturer encroachment and store brands may lead to a win-win-win outcome for the manufacturer, the retailer, and the consumer.