Product Assortment and Pricing in the Presence of Retail Competition and Store Brands

Annual sales of store brands and retailer introductions of new store brands have grown quickly in recent years. We address retailers' product assortment decisions (in terms of store and national brands) and related pricing decisions at two competing retailers, along with pricing decisions of a leading national brand manufacturer. Each retailer can o er the national-brand product and a competing store-brand product in the same category. We model the dynamics via a manufacturer-Stackelberg game. The national brand manufacturer rst sets a wholesale price (the same for both retailers) and then the retailers engage in a Nash pricing game for the product(s) they choose to carry. Finally, customers, who are heterogeneous with respect to both their loyalty to the retailers and their willingness to pay for quality, decide whether and what to purchase. Among other things, we derive conditions in which the retailers o er only one of the products or both. We also characterize the national brand manufacturer's wholesale pricing strategy, and in particular, show how it depends upon the quality levels of the store-brand products. We explore the e ects of customer loyalty and di erential unit variable costs (as a function of quality) for the two store brands on equilibrium characteristics.