Strategic Selection of Direct Selling and Private Brand in Retail Market under Manufacturer Stackelberg
Author
Abstract
Private brand has become an important contributor to the retail channel. Major retailer like Wal-Mart has developed a large number of private brands in the retail markets. Meanwhile, manufacturers like Levis, Sony and Avon, adopt a direct selling channel besides a dealing channel to successfully compete against other retailers' private brands. Multiple channels' development has become a very important strategy for both manufacturers' and retailers' distribution of products in a competitive market. However, there have been a limited number of studies focusing on both the retailer's and manufacturer's perspective. Most of the existing literature focuses on the strategic interactions within a single channel.
This paper studies the strategic selection of manufacturers' direct selling and retailer's private brand in retail market under Manufacturer Stackelberg in a three-stage three-person non-cooperative game as follow. Two manufacturers, besides dealing channel, decide whether to sell directly, and one retailer decides whether to adopt a private brand. Then manufacturers set their wholesale prices for dealing channel's goods. In the last stage, all manufacturers/retailer compete in price margins. Goods are assumed to have linear demands with vertical strategic substitutability which consider the effects of both product differentiation and store differentiation.
Our results can be summarized as follows. Direct selling and private brand are dominant strategies for manufacturers and retailer, respectively. Both consumer surplus and social welfare are the highest in equilibrium. An increase in sales channels promotes its total demand, but this evokes fierce competition between products and stores. Thus, manufacturers are beneficial to sell their products directly as well as through the existing dealing channel, and the retailer is beneficial to sell its private brand product as well as manufacturers' products. Retailers have the incentive to develop their private brands because of consumers' low loyalty to the brand name, high substitutability between products, and high purchasing frequency. Product reputation and no advertising cost of a retailer's private brand products benefit itself in the market. Manufacturers have the incentive to sell products directly due to the economies of scale. The low cost and the margin transferred from the retailer to manufacturers in the dealing channel can bring manufacturers more profit. In other words, channel members gain more profits through additional channels, even though there exists fierce price competition in the market. The results are supported by Raju et al. (1995), Trivedi (1998) and Ross et al. (2005). The diversification of products and stores increases consumers' willingness to pay and thus, promotes consumer surplus and welfare. These results fit those reported in Trivedi (1998) that consumers benefit the most from a direct selling channel with the greatest demand and the lowest prices.
Good in dealing channel has the lowest margin and the highest retail price among all sales channels. The ranking of goods' quantities demanded are private brand, direct selling and dealing channel, accordingly. Product sales through zerolevel channels, such as direct selling channel and/or private brand channel, avoid exploitation by middlemen (Kotler, 1991). Moreover, the retailer can produce private brand products at a low cost through OEM and manufacturers can sell their products directly. Though products are sold through zero-level channels with higher margins, their prices may be lower than in one-level channels. Hence, the margin is the lowest and the retail price is the highest in the dealing channel.
When products are less differentiated, wholesale price and retail price are lower and quantity demanded is higher in dealing channel, and margin and retail price are lower and quantity demanded is higher in both direct selling and private brand. Manufacturers' profits are lower. When the substitutability of products increases, increase in product competition forces manufacturers to decrease the margins in the direct selling channel and the retailer to decrease the margin in its private brand channel in order to attract consumers of substitute products. Manufacturers are forced to reduce the wholesales prices in the dealing channel. Thus, retail prices in all channels decrease and quantity demand increase. In the end, manufacturers' profits decrease.
When stores are less differentiated, margin and retail price are lower and quantity demanded is higher in dealing channel, quantity demanded is higher in direct selling, and margin and retail price are lower and quantity demanded is higher in private brand. Retailer's profits are lower. When the substitutability between stores increases, increase in store competition forces all manufacturers and the retailer to decrease their margins. Accordingly, all retail prices decrease and the corresponding quantities demanded increase. Finally, fierce competition makes the retailer worse off and its profit decreases as reported in Choi (1996).
