National brand's response to store brands: Throw in the towel or fight back?

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.