Seminar: Fabian Berges; University of Toulouse.

Title: Is Producing a Private Label Counterproductive for a Branded Manufacturer?

Abstract:

Private labels (or store brands) have clearly changed the relationships between manufacturers and retailers since the latter have gained bargaining power because of this new product competing with branded goods. However, looking into details show that some branded manufacturers also produce retailers' brands. These manufacturers mainly argue that it is for using excess production capacities.

In a framework composed by a branded manufacturer and a retailer, we study the distributor's private label strategy for production. We first show that the retailer entrusts his store brand to an independent firm when the quality of the national brand is intermediate. For high values of the branded good product, the retailer asks the branded manufacturer (possessing a cost-advantage) to produce his private label for efficiency reasons.\\

We then extend our model to capacity constraint for the branded manufacturer. We show that if the capacity constraint affects both products, then the retailer prefers to choose an independent firm whereas he was electing the branded manufacturer when unconstrained. If capacity constraint applies only to store brand production, there is a zone where the retailer may change his strategy for store brand production by turning to an independent firm instead of remaining with the branded manufacturer.

The conclusions of our article partially confirm branded manufacturers' statement: they may produce store brand when they are not capacity constrained. Otherwise, it depends on the production technology features.