Quality competition between national and store brands

Abstract

The private label literature assumes that store brands (SBs) are of lower quality than competing national brands (NBs). To contest this notion, this paper examines the quality competition between a NB manufacturer and a SB retailer. The NB manufacturer sells its products through the retailer, and hence the manufacturer and the retailer are in competition. Once both parties decide the right quality level of their respective products, the retailer decides the retail prices for both brands. Using a general quality-dependent cost structure, we explicitly characterise both the price- and quality-level equilibriums under various channel power structures. We find that the SB might have a higher quality level than the NB even with no cost disparity, but will have a lower retail price than the NB, whether its quality is superior or not. Further, price and quality competitions have opposite implications for equilibrium solutions as well as profitability levels. Interestingly, the manufacturer may benefit from a more costly production or quality investment scenario, although both the retailer and the supply chain may suffer from it. The paper highlights the importance of accountability for quality decisions in the study of private label products.