S. Chan Choi

Price competition in a duopoly common retailer channel

Abstract Today s retail market for most consumer goods is dominated by large retail chains. These powerful retailers are often much larger than most manufacturers, and they usually carry multiple brands in most product categories. Despite their increasing influence on the market, it is only recently that their perspective of channel problems began to gain attention of analytical studies. We add to this growing literature of channel studies by modeling price competition in the most common channel type: multiple common retailers. In particular, this paper deals with a channel structure in which there are duopoly manufacturers and duopoly common retailers. One of our major findings is that, while (horizontal) product differentiation helps manufacturers, it hurts retailers. Conversely, while (horizontal) store differentiation helps retailers, it hurts manufacturers. Other effects of these two types of differentiation on equilibrium solutions are also analyzed. Managerial implications of the results are derived and summarized in the Executive Summary.

A Gravity-Based Multidimensional Scaling Model for Deriving Spatial Structures Underlying Consumer Preference/Choice Judgments

In multidimensional unfolding multidimensional scaling (MDS) procedures, the predicted utility of a brand for a consumer is inversely related to the distance between that consumer’s ideal point and the brand position in the derived space. Most MDS models treat all brands the same regardless of their respective market share. In many product categories, however, consumer preferences are heavily influenced by the size of the existing market share (i.e., the brand mass). This article presents two versions of a new spatial methodology that incorporates the effects of brand as well as consumer mass via a spatial gravity model of consumer utility; that is, the attraction of a brand for a consumer depends not only on the distance of the brand from a consumer’s ideal point but also on the current market size of the brand, as well as the consumer purchase pattern and volume. One version of the proposed model estimates brand positions and individual ideal points with two‐way or three‐way pick any/N binary choice data. The second version we develop provides the same spatial decomposition for two‐way or three‐way metric preference/dominance data. We also develop a series of nested MDS models to estimate, test, and compare four different model structures with respect to any common data set. We illustrate the proposed methodology using an actual commercial application involving physician prescription behavior and examine competing model fits.

Game theoretic derivations of competitive strategies in conjoint analysis

While conjoint analysis has been applied in a wide variety of different contexts in Marketing, most applications fail to explicitly consider retaliatory reactions from competitors. In this paper, a methodological extension is developed for conjoint analysis by explicitly modeling competition in a game theoretic context. The Nash equilibrium concept is employed to model competitive reactions to produce design, and its implications for reactive product strategies are discussed. The optimal product design problem for each firm is formulated as a nonlinear integer programming problem, which is solved via a specialized branch and bound method combined with a heuristic. In order to compute a Nash equilibrium, a sequential iterative procedure is proposed. The proposed procedure is illustrated under several scenarios of competition using previously published conjoint data.

Duopoly pricing under risk aversion and parameter uncertainty

Most pricing studies assume that firms have complete information about demand. In practice, managers must make decisions, given incomplete information about the demand for their own products as well as those of their rivals. This paper develops a duopoly pricing model in which firms market differentiated products in a world of uncertainty. Results show that the predictions of standard strategic pricing models may not hold when firms face parameter uncertainty and are risk‐averse. Under well‐defined conditions, there may be a “first‐mover” disadvantage to the firm that attempts to be the Stackelberg price leader in the market, especially in a market where demand is highly uncertain. Interestingly, if parameter uncertainty is sufficiently high, it may even be necessary for the price leader to share market information with its rival. When firms are risk‐averse, uncertainty generally decreases equilibrium prices and the variabilities of profits.

Defensive Strategies Against a Private Label: Price Cut vs. Brand Building

Private labels have become a major force in retail marketing posing a great threat to national brands. In many product categories, they are among the best-selling brands. Understanding the nature of competition from private labels is essential in designing defensive strategies for the national brands. To a national brand manufacturer, a retailer who sells the private label is both a channel partner and a competitor at the same time. However, this competitor also controls the retail price of the national brand, which gives the retailer a greater pricing power. Hence, it is important for the national brand to formulate a defensive strategy that is consistent with the retailer’s interest. In this paper, we examine two major defensive strategies for a manufacturer facing a private label competition: price cutting and brand-equity building. A game theoretic model is employed to examine these strategies in a competitive scenario. We build our demand model by mixing a consumer reservation price distribution and a brand equity distribution. The existing literature generally indicates that the national brand manufacturer’s best reaction to an introduction of private label is to simply cut its wholesale price in the hope to lower its equilibrium retail price. On the contrary, however, our model shows that the national brand’s retail price tends to increase despite the lower wholesale price. That is because the retailer has an incentive to amplify the price gap between the two products in order to make room for his own private label. Moreover, a wholesale price cut tends to decrease the retailer’s total profit by cutting the private brand’s price further. Thus, a national brand manufacturer is unlikely to find the retailer cooperation when cutting its wholesale price. This implies that, if the national brand manufacturer relies solely on price competition as a defensive strategy, a significant wholesale price cut is necessary. Even so, its retail price would barely decrease if at all. On the other hand, we also show that a manufacturer who focuses more on building brand equity by various marketing efforts can expect a full cooperation from the retailer. This is because the retailer also benefits from the increased brand equity of the national brand: i.e., the retailer’s total profit increases, although his profit from the private label decreases. As a result, the retailer has a smaller incentive to aggressively push his private label at the expense of the national brand. This implies that brand building should be the first line of defense instead of aggressively cutting the wholesale price. The benefit to the retailer could even justify cost sharing of brand-building efforts with the retailer.

Defensive Strategy Against a Private Label: Building Brand Equity

We build a game-theoretic model of price competition between a national brand manufacturer and a retailer that also sells its private label. In particular, we examine brand-equity building as a strategy for the national brand manufacturer. We find that brand building should be the first line of defense instead of aggressively cutting the wholesale price. Not only the national brand but also the retailer can benefit from it, which can justify cost sharing of brand-building efforts with the retailer.