Multitier Store Brands and Channel Profits

Abstract

Multitier store brands are increasing in significance in retail outlets. In this article, the authors theoretically examine the rationale for the existence of multitier store brands, their optimal quality levels, and their implications for consumer welfare and channel profits. They show that despite the manufacturer's efforts to deter the entry of store brands by providing side payments and/or introducing additional national brands, the retailer will offer multitier store brands in equilibrium. Furthermore, the quality levels of store brands and national brands are interlaced, with a store brand taking the top-quality position unless national brands outnumber store brands. Even though the proliferation of store brands reduces product differentiation, it does not decrease consumer welfare or channel profits. However, store brands hurt the manufacturer's profits and make two-part tariffs ineffective in improving channel coordination. Nonetheless, the retailer can enhance channel coordination by procuring the store brand from the national brand manufacturer. The authors extend their model in several directions to capture additional features of retail markets and assess the robustness of their findings.