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Private Labels and Retailer Profitability: Bilateral Bargaining in the Grocery Channel

55 Pages Posted: 2 Oct 2017  

Paul B. Ellickson

University of Rochester - Simon Business School

Pianpian Kong

SUNY at Buffalo - School of Management

Mitchell J. Lovett

Simon School of Business – University of Rochester

Date Written: September 29, 2017

Abstract

We examine the role of store branded "private label" products in determining bargaining outcomes between retailers and manufacturers in the single-serve brew-at-home coffee category. Exploiting a novel setting in which the dominant, single-serve technology was protected by a patent that prevented private label entry, we develop a structural model of demand and supply-side bargaining and seek to quantify the impact of private labels on retailer profits. To quantify the benefits of private label introduction, we decompose their impact into the direct profits (from adding an additional product) and the bargaining benefit on branded products (from increasing retailer's bargaining leverage), netting out the business stealing effects on incumbent branded products. We find that bargaining outcomes are driven primarily by bargaining leverage, while bargaining ability is relatively symmetric between retailer and manufacturer. Moreover, the impact of bargaining leverage is substantial: increased bargaining leverage accounts for roughly 20% of the overall benefit of private label introduction, which is itself on the order of 10% of pre-introduction profits. Finally, we find that private labels are beneficial to all retailers, but some retailers gain much more than others.

Keywords: Retail Grocery, Bargaining Models, Private Labels, Store Brands, Demand Estimation

Suggested Citation

Ellickson, Paul B. and Kong, Pianpian and Lovett, Mitchell J., Private Labels and Retailer Profitability: Bilateral Bargaining in the Grocery Channel (September 29, 2017). Available at SSRN: https://ssrn.com/abstract=3045372

Paul B. Ellickson (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Pianpian Kong

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

Mitch Lovett

Simon School of Business – University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

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