Wholesale Pricing with Asymmetric Information About the Quality of a Private Label

Abstract

This article presents a mechanism design analysis of the optimal wholesale tariff proposed by the monopolistic manufacturer of a branded product to a monopolistic retailer if the retailer also sells a private label whose quality is unobserved by the brand manufacturer. While prior literature had suggested that the manufacturer potentially forecloses the private label in an alternative situation with asymmetric information about aggregate demand, the present model suggests a markedly different result: The manufacturer optimally requires the retailer to sell \textit{too much} of the competing private label.

Keywords: Asymmetric information, branded product, market share contract, Mechanism Design, private label product