Nearly a quarter of all products purchased in U.S. supermarkets and drug stores are store brands (SBs). Although the presence of SBs benefits both consumers and retailers, it is a threat to the dominance of the incumbent national brand manufacturers (NBMs). When considering the potential threat of an SB, an NBM generally pursues one of three strategies: accommodate, displace, or buffer. Under the accommodation strategy, the NBM repositions the products in his existing product line. Under the displacement strategy, the NBM elects to supply the SB to preempt the entry of the SB supplier. Under the buffering strategy, the NBM adds a defender product, which competes with his own product offering and the new SB. Using a game-theoretic model, we consider a market where consumers are heterogeneous in their valuation of product quality and analyze an NBM's response to an SB threat. We focus on two important drivers: the NBM's ability to differentiate on the quality dimensions and his cost advantage over the outside supplier of SB. To completely characterize the NBM's response, we consider two regimes. In the first regime, the NBM is a monopolist producer. In the second regime, the retailer has the added option of procuring an SB product from an independent, nonstrategic SB manufacturer. By comparing the results from both regimes, we develop a descriptive theory that clarifies the incentives of the NBM to accommodate, displace, or buffer. In doing this, we determine how the NBM's whole product portfolio should be designed, i.e., the positioning (quality levels) and prices of all its offerings.

This paper explores the merits of hedging stochastic input costs (i.e., reducing the risk of adverse changes in costs) in a decentralized, risk-neutral supply chain. Specifically, we consider a generalized version of the well-known “selling-to-the-newsvendor” model in which both the upstream and the downstream firms face stochastic input costs. The firms’ operations are intertwined—i.e., the downstream buyer depends on the upstream supplier for delivery and the supplier depends on the buyer for purchase. We show that if left unmanaged, the stochastic costs that reverberate through the supply chain can lead to significant financial losses. The situation could deteriorate to the point of a supply disruption if at least one of the supply chain members cannot profitably make its product. To the extent that hedging can ensure continuation in supply, hedging can have value to at least some of the members of the supply chain. We identify conditions under which the risk of the supply chain breakdown will cause the supply chain members to hedge their input costs: (i) the downstream buyer’s market power exceeds a critical threshold; or (ii) the upstream firm operates on a large margin, there is a high baseline demand for downstream firm’s final product, and the downstream firm’s market power is below a critical threshold. In absence of these conditions there are equilibria in which neither firm hedges. To sustain hedging in equilibrium, both firms must hedge and supply chain breakdown must be costly. The equilibrium hedging policy will (in general) be a partial hedging policy. There are also situations when firms hedge in equilibrium although hedging reduces their expected payoff.

Adaptive base stock policy is a well-known tool for managing inventories in nonstationary demand environments. This paper presents empirical tests of this policy using aggregate, firm-level data. First, we extend a single-item adaptive base stock policy in previous literature to a multi-item case. Second, we transform the policy derived for the multi-item case to a regression model that relates firm-level inventory purchases to firm-level sales and changes in sales forecasts. We focus on two research questions: Can the adaptive base stock policy explain cross-sectional ordering behaviors under sales growth? To the extent that the adaptive base stock policy fails to explain ordering behaviors under sales growth, are there frictions that explain such a finding? Our empirical results demonstrate disparities in ordering behaviors between firms experiencing high and moderate sales growth. Contrary to theoretical prediction, this implies that inventory purchases are a function of not only current sales and changes in sales forecast but also past sales growth. As potential explanations for this departure from theoretical prediction, we show that both future demand dynamics and inventory holding risks depend on past sales growth. In addition, we find that firms' inventory holding risks may also be affected by purchasing constraints imposed by supply chain contracts. Our results provide managerial implications for practitioners and inform future theoretical research. This paper was accepted by Martin Lariviere, operations management.

Previous studies have shown that quantity commitment by all firms in an industry mitigates price competition. This paper shows that when firms have a choice, asymmetric outcomes can arise, with some firms choosing to commit to a quantity and other firms choosing not to. To study the commitment decision, we analyze a multistage game within a duopoly of differentiated firms à la Hotelling. In the first stage of the game, firms choose whether or not to commit to a quantity. In the second stage, each firm that chose to commit sets a quantity, which represents an upper bound on how much it can sell to consumers. In the third stage, both firms set prices strategically, regardless of whether or not they committed. In the final stage, demand is allocated as consumers maximize their utilities. Firm(s) that chose not to commit to a quantity in the first stage can fulfill any quantity that consumers demand at the equilibrium prices. We find that if product differentiation is sufficiently low, both firms choose to commit to a quantity in equilibrium. This symmetric equilibrium allows both firms to avoid the intense price competition associated with low product differentiation. If the level of differentiation is sufficiently high, the equilibrium in quantity commitment is asymmetric such that one firm chooses to commit and its competitor chooses not to commit. Under this equilibrium, a pricing equilibrium in pure strategies does not exist, only a pricing equilibrium in mixed strategies does, and the equilibrium prices can result in a committed firm not clearing the entire quantity it chose earlier. This paper was accepted by J. Miguel Villas-Boas, marketing.

To expand sales, many manufacturers try to develop and sell product lines. Frequently, however, the operations of distributing a product line creates tension between manufacturers and retailers as they do not necessarily agree on which product versions included in the product line should be sold to consumers. To mitigate this tension, previous literature has shown that if a manufacturer (he) wants to sell his product line through a retailer (she) who faces deterministic demand, then he needs to adjust his product qualities according to her requirements; otherwise she will not carry the entire line. In contrast, this paper shows that if demand is stochastic, then a manufacturer can mitigate the same tension merely by re-allocating inventory risk in the supply chain. This strategy can be so effective that it is possible to find cases where the equilibrium product line is actually longer in a decentralized supply chain than in the direct-selling case. To understand the tradeoff, we consider a supply chain with a manufacturer capable of producing multiple product designs and a retailer who faces stochastic consumer demand. The manufacturer sells his output through the retailer using one of the following variations on the classical wholesale contract: push (PH), pull (PL), or instantaneous fulfillment (IF). With PH and PL (IF), wholesale prices and quantities are decided before (after) demand is revealed. Retail prices are always set after demand is revealed. With PH (PL) the retailer (manufacturer) carries retail inventory. Taking the manufacturer's point of view, we characterize the equilibrium product line length and equilibrium contracting strategy. Our answers are determined by three important drivers: demand variability, product substitutability, and the retailer's outside option. Low outside option and low (high) substitutability imply that the manufacturer maximizes his expected profit offering the retailer longer (shorter) product line using the IF contract. As outside option increases, the equilibrium contract will be either PH or PL. High demand variability and low substitutability imply that the manufacturer should be expected to sell a longer product line with a PH contract. Low demand variability and high substitutability imply that the manufacturer should be expected to sell a shorter product line with a PL contract.