Managing competitive levers in a collaborative distribution channel

This paper studies a distribution channel where a national brand manufacturer and a dominant retailer collaborate to promote the national brand product. To obtain an advantageous competitive position, the dominant retailer may introduce a store brand, whereas the national brand manufacturer may distribute its products through an alternative channel (e.g., a weak retailer). We study how the two channel members should manage their competitive levers (i.e., the store brand for the dominant retailer and the manufacturer’s weak retailer) in such a collaborative distribution channel. On the one hand, we show that the channel members should use the competitive levers as long as they are efficient enough so that the manufacturer and dominant retailer can obtain higher margins from these levers than that from the national brand at the dominant retailer. On the other hand, we also find that the manufacturer and dominant retailer may not necessarily benefit from more efficient competitive levers. That is, the dominant retailer may prefer a less efficient source to procure the store brand product, and the manufacturer may choose a less efficient weak retailer. Moreover, we discover an interesting observation driven by the network externality effect: a firm may benefit when its competitor becomes more efficient (e.g., more efficient store brand procurement at the dominant retailer will increase the weak retailer’s profit). All the above findings hinge upon the collaboration between the national brand manufacturer and dominant retailer, which cautions firms on how to manage their competitive levers in a collaborative distribution channel.