Private-Labels and the Channel Relationship : A Cross-Category Analysis

Retailers may introduce a private-label product in a category not only to gain profits directly from the sales of the private-label but also to use as a strategic weapon to elicit concessions from the national brand manufacturers in the category. We model the competition between the national brand manufacturers and the retailer as a simple game. We show that in certain categories, the retailer can gain better terms of trade by introducing a private-label. The ability of the retailer to use the private-label for this purpose is hypothesized to be inversely related to perceived category risk and positively related to the ability of the retailer to offer a private-label of high quality. We derive closed form solutions for the pricing decisions of both the national brand manufacturer and the retailer. The implications of our model are supported by data from a cross-section of categories comprised of frequently purchased grocery items