Is Online Channel a counterstrategy to the Store Brand by the National Brand?

We study the strategic interaction between the introduction of an online channel by a national brand manufacturer (NBM) and the introduction of store brands by the retailer. We consider three models: (i) the base model without the online channel in the market but the retailer is allowed to introduce the store brand; (ii) the base model without the store brand in the market but the NBM may introduce the online channel; and (iii) the model with both the online channel and the store brand in the market. We find that 1) the NBM is not always better off when he introduces the online channel to offset store brand threat, unless the online channel is sufficiently efficient; 2) the retailer’s profit depends on the interaction of the following two effects: the direct effect of demand cannibalization from products sold through the online channel; and the indirect effect (the strategic effect) of lower wholesale price given by the NBM. When the online channel is not efficient enough, the indirect effect dominates and the retailer benefits from the introduction of the online channel, which, however, seldom happens in our cases. Moreover, the retailer will always be better off when she introduces the store brand to compete with the NBM, which hurts the NBM all the time. Our study enriches the literature by proposing that online channel may be a counterstrategy of NBMs when facing the threat of store brand introduced by the retailer.