The impact of advertising and product quality on sales mode choice in the presence of private label

The choice of selling format is a critical challenge that e-tailers and manufacturers encounter. Furthermore, with the increasing prevalence of e-commerce, e-tailers have started creating their own private labels (PLs) and competing with national brands (NBs). This paper investigates the influence of the selling format on a supply chain involving an NB manufacturer and an e-tailer who introduces its own PL. Both the e-tailer and the manufacturer invest in advertising and the quality level of their products. Game-theoretic models are developed under agency selling and reselling contracts, and equilibrium prices, advertising efforts, and quality levels are derived. The findings reveal that the dominant selling format significantly depends on advertising efforts and quality. When there is a high degree of competition between PL and NB, it is more likely that agency selling dominates reselling. Furthermore, agency selling may lead to higher NB and PL prices depending on the quality and advertising investments.