Store-Brand Introduction and Multilateral Contracting

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 on 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: The methodology is noncooperative 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 elicits 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 nonboundary 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 light 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 SBs with negligible sales. Because of the intricate impact of SBs on contracting sequence, these two instruments should be jointly analyzed.