Do Private Labels Increase Retailer Bargaining Power?

44 Pages Posted: 9 Feb 2010

See all articles by Sergio Meza

Sergio Meza

University of Guelph

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

Date Written: February 9, 2010

Abstract

Like any new product, private label entry increases competition within a category leading to downward pressure on both wholesale and retail prices. But, given the higher margins for private labels and potential bargaining benefits for retailers, they have incentives to help private labels gain market share. The paper addresses two questions: First, do private labels enhance a retailer's bargaining power with respect to manufacturers? Second, given the higher profitability and potential increase in bargaining power, does the retailer strategically set retail prices to favor and strengthen the private label?

We find support for the “bargaining power” hypothesis, but qualified support for the "strategic retailer pricing" hypothesis. Retailers gain bargaining power through lower wholesale prices on imitated national brands. But the gain is greater in niche categories than in mass categories, suggesting that niche national brands with limited “pull” power lose greater bargaining power. In terms of strategic pricing, the retailer, on initially introducing the private label, strategically sets prices to help private labels gain market share in high volume mass market categories. But retail prices revert to the category profit maximizing price after a year when the private label gains a stable market share.

Keywords: bargaining power, store brand, private label, retailer pricing, NEIO, BLP, chanel power, category profit maximization

JEL Classification: L11, M31, D40, C10, C30

Suggested Citation

Meza, Sergio and Sudhir, K., Do Private Labels Increase Retailer Bargaining Power? (February 9, 2010). Available at SSRN: https://ssrn.com/abstract=1550419 or http://dx.doi.org/10.2139/ssrn.1550419

Sergio Meza (Contact Author)

University of Guelph ( email )

Guelph, Ontario
Canada

K. Sudhir

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-3289 (Phone)
203-432-3003 (Fax)

Yale University-Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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