| I examine empirically national brands' responses to a store brand introduction and derive effective counterstrategies, in terms of pricing and advertising, for national brands to the store brand invasion. I build a market model where multiple national brands sell through a common retailer to end consumers. On the demand side, a random-coefficient logit model is used to account for heterogeneity in consumer choice behavior. On the supply side, the national brand manufacturers set wholesale prices and advertising expenditures first, and the retailer then sets retail prices for all the brands it carries, taking into account the wholesale prices and advertising levels.; Using sales data from a large supermarket chain and the corresponding advertising data from TNS, I calibrate the proposed model for the hot breakfast cereal category. The findings suggest that the overall demand does not change with the introduction of a store brand, but different national brands react very differently to the same store brand entry. While some national brands respond by trying to limit the entry scale of the store brand, others accommodate the entry of the store brand. Finally, I conduct what-if experiments to examine a set of alternative counterstrategies that national brands can use. I compare the profits derived under these alternative counterstrategies to those from the actual national brand responses and thus infer effective counterstrategies of the national brands to the store brand introduction. The results show that the existing national brands' pricing responses are generally in the right directions. The national brands may benefit from measures such as tacit price collusion between national brands, nonlinear pricing schemes, and more intensive advertising. |
