PRICE AND ADVERTISING STRATEGY OF A NATIONAL BRAND AGAINST ITS PRIVATE-LABEL CLONE - A SIGNALING GAME APPROACH

Price and advertising strategies of a national brand challenged by a private-label clone in a frequently purchased consumer package good category ave examined. The situation is developed in the framework of a signaling game, in which the national brand manufacturer is a signal (advertising) sender and the consumer is a receiver. The game is solved for the separate, pooling, and hybrid equilibria. Applications of the perfect Bayesian equilibrium criterion and other refinement concepts led to a unique separating equilibrium. This result suggested that if the quality of a national brand is superior to that of its private-label clone, its manufacturer should advertise more than it would if its product were similar to the clone in quality. The level of advertising must be just high enough to maintain differentiation from the clone-quality national brand manufacturer, for which advertising is inefficient because of low product quality. Consumers, after observing the high level of advertising, realize that the clone-quality national brand manufacturer would not have spent that much advertising and hence are willing to pay a premium for the difference in quality. Consequently, the superior quality national brand can charge a higher price and increase its profit.