Impact of store brand competition on retailer's strategic inventory in decentralized supply chains

Abstract

AbstractRetailers often sell their own store brands that compete with the national brands. Store brand competition induces the supplier to quote lower wholesale prices for national brands. In multi‐period selling environments, retailers may complement this wholesale price reduction by carrying strategic inventories. Hence, store brand carrying retailers face the following dilemma. On the one hand, strong store brand competition might be sufficient to lower the national brand's wholesale price substantially. In this case, the retailer need not carry any strategic inventory. On the other hand, the wholesale price reduction induced solely by store brand competition might not be substantial. In this case, the retailer might want to carry either national brand or store brand strategic inventory to complement the wholesale price reduction. We address the above dilemma by investigating the effect of store brand competition on the strategic inventory decision using a two‐period game‐theoretic framework. We enhance the current understanding of the retailer's strategic inventory by incorporating the impact of store brand competition. Our analysis reveals that it is never optimal for the retailer to carry store brand as strategic inventory even when the store brand and the national brand are close substitutes. We also find that a store brand selling retailer may become worse off when being endowed with the option of carrying strategic inventory. However, when the holding cost is sufficiently low, we show that the strategic inventory and store brand competition complement each other and benefit the retailer.