Competing through copycats or private labels?: Entry strategies for small manufacturers

Abstract

This paper explores the strategic decisions faced by a small manufacturer entering a market dominated by a larger manufacturer. Due to the lack of technical superiority, the small manufacturer needs to choose between producing copycats or private labels. To address this, we propose a two‐period game theoretical model that encapsulates the strategic interactions between a dominant manufacturer of genuine products and a smaller manufacturer producing either copycats or private labels, considering both strategic and myopic consumers. Our research indicates that consumers' purchasing decisions are influenced not only by price, but also by product quality, brand value, and consumer patience. Our equilibrium analysis suggests that, as the production cost of genuine products increases, the small manufacturer will sequentially adopt a passive production strategy for copycats, an active acceptance strategy to produce private labels, and an active rejection strategy to produce copycats. We also study Pareto‐improving contracts where the dominant manufacturer lowers the wholesale price to incentivize collaboration with the small manufacturer in producing private labels, leading to a mutually beneficial outcome. To complement our theoretical findings, we include numerical studies that further elaborate on our results.