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1. Why do leading brand manufacturers supply private labels?....................................................................... 1

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Why do leading brand manufacturers supply private labels?

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Resumen: Private labels are gaining increasing importance in many industries. While there are obvious benefits
for retailers to embrace private labels, the standard explanations for manufacturers' involvement (idle capacity,
buffer against follower brands, retailer's conditions) do not explain it completely. This paper seeks to provide an
additional explanation. An economic model of vertical differentiation is proposed. The model shows that, once
the retailer has decided to introduce the private label, and depending on the quality positioning chosen by the
retailer, both manufacturers find situations where they are better off by not supplying the store brand and
allowing the other manufacturer to produce the private label, but also situations where they prefer to produce
the private label. Also, it is shown that retailers will choose the high-quality manufacturer for its premium store
brand, and the low-quality manufacturer otherwise, and this decision is not based on the set of skills possessed
by each manufacturing company. The model contributes to explaining why private label supply is becoming so
pervasive among all kinds of manufacturers under a variety of circumstances. [PUBLICATION ABSTRACT]
Enlaces: Enlaces
Texto completo: Selected Papers from the B2B Track of the 2006 Academy of Marketing Science Conference
Edited by Jeffrey Lewin
An executive summary for managers and executive readers can be found at the end of this issue.
Introduction
Private labels[1] are gaining increasing importance in many industries. While some years ago they seemed to
be confined to consumer packaged goods (CPG) sold through some large retailers, nowadays they command
large and growing market shares. According to the Private Labels Manufacturers Association, store brands' unit
market share in US supermarkets was 20.8 percent and their dollar market share was 16 percent in 2005, and
they account for around $41 billion in yearly sales in US supermarkets alone ([17] Private Labels Manufacturers
Association, 2006). Market shares for private labels in Europe are even higher at 40 percent ([2] Boyle, 2003).
Also, private labels are not positioned at the bottom of the market any more, as premium private label ranges
continue to grow ([31] Wittner, 2003) and position themselves at quality levels sometimes above those of all
other brands in the category. The private label phenomenon is not only pervasive in CPG retailing, but also
present in such diverse industries as investment funds, fixed-income securities, software, electronics, contact
lenses, wine, pharmaceuticals, books and others.
There are obvious benefits for retailers to embrace private labels: although the retailer has to absorb some
additional merchandising and inventory costs, private labels have up to 20-30 percent wider gross margins than
manufacturer brands[2] ([11] Hoch and Banerji, 1993; [10] Hoch, 1996, [1] A.C. Nielsen, 2005), feedback on
sales is faster allowing a quicker response to market changes, and they generate brand awareness and
consumer loyalty throughout the store ([5] Corstjens and Lal, 2000), while differentiating the store from the
competition, enhancing the retailer's negotiating position with suppliers and offering a higher degree of strategic
flexibility and control for the retailer ([10] Hoch, 1996; [16] Nandan and Dickinson, 1994; [23] Scott Morton and
Zettelmeyer, 2001). However, the benefits for the manufacturers of private labels are far from obvious,
especially for the manufacturers who sell their own brands but also manufacture retailer brands competing
against their own. Some authors argue strongly against it ([19] Quelch and Harding, 1996) while others broadly
favor the involvement of brand manufacturers in the production of private labels ([12] Kaven and Call, 1967; [8]
Dunne and Narasimhan, 1999). A number of arguments have been provided in an effort to explain why brand
manufacturers make store brands ([19] Quelch and Harding, 1996; [12] Kaven and Call, 1967; [8] Dunne and
Narasimhan, 1999). One reason is that manufacturers have an incentive to supply private labels in order to fill
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idle capacity. Some mention the use of private labels as a buffer between leading brands and follower brands.
And finally, supplying private labels has been justified in terms of the increasing power of retailers who condition
the purchase of branded products to the supply of private labels or make it part of a wider collaborative effort to
serve their customers ([4] Corsten and Kumar, 2005). However, these arguments do not explain the
phenomenon satisfactorily. First, private label supply contracts are often long-term and manufacturing
companies plan and invest for them, rather than use them in response to short-term variations in demand for
their branded goods, making it difficult to explain in terms of idle capacity alone. Also, the positioning of the
private label is a decision made by the retailer, not the manufacturer, and therefore cannot be considered a
strategic decision variable for the manufacturer. Furthermore, there is theoretical and empirical evidence that
retailers often choose to position their store brands as close as possible to the stronger national brand ([22]
Sayman et al. , 2002). Finally, while very large retailers do have the power to extract private label concessions
from smaller manufacturers, the fact remains that smaller retailers also use private labels and large
manufacturers with leading brands do supply private labels ([2] Boyle, 2003), including GE, Kraft, Parmalat,
Unilever, Agfa, Wyeth and others. In fact, [19] Quelch and Harding (1996) report that over half the
manufacturers of branded CPGs also produce private labels.
Obtaining information about private label programs by national brands is extremely difficult as most of them
keep them confidential, largely for fear of the impact they might have on their main brands. Therefore, we
approached the problem using a game-theoretical approach. We try to explain the phenomenon of leading
brand manufacturers supplying private labels using a model of vertical differentiation. It shows that, depending
on the quality positioning chosen by the retailer, both manufacturers find situations where they are better off by
not supplying the store brand and allowing the other manufacturer to produce the private label, and situations
where they prefer to produce the private label. This goes against [8] Dunne and Narasimhan's (1999) contention
that the threat of entry by another manufacturer is a sufficient condition for a branded good manufacturer to
supply private labels.
We base our discussion on the results of a model of vertical differentiation inspired by [14] Moorthy (1988) that
departs from the existing analytical literature on private labels in two main aspects (the detailed mathematical
formulation of the model is given in the Appendix). On the demand side, we use an explicit consumer utility
function where the main determinant of choice is the relative price-quality ratio for each brand. Unlike other
authors ([23] Scott Morton and Zettelmeyer, 2001), we do not require the national brands to be preferred to the
private brand under equal prices, thus offering a more realistic depiction of a market where premium private
labels abound and are often preferred to national brands. On the supply side, while other authors use a third
party who is not a strategic player as the supplier of the private label ([20] Raju et al. , 1995; [23] Scott Morton
and Zettelmeyer, 2001), or assume that one of the manufacturers necessarily manufactures only the private
label ([7] Cotterill et al. , 2000), we require the private label to be manufactured by one of the national brand
manufacturers behaving strategically. This is in line with our purpose to study the supply of private labels by
national brand manufacturers, but it can also accommodate the manufacture by an independent third party or a
specialist, since the manufacturers in our model can choose to produce only the store brand, and the decision
to become a private label specialist is endogenous. In fact, one of the results of our model is that when a retailer
chooses to introduce a private label at a quality level between that of the existing brands in the market, and
chooses the low-quality manufacturer to make the store brand, the low-quality manufacturer drops its own brand
and becomes a private label manufacturing specialist. [24] Sethuraman (2003) decomposes the price premium
consumers pay for national brands over store brands into quality and non-quality equity. In our case, we
consider only differences in quality (vertical differentiation), but we do not model horizontal differentiation. Since
the retailer appears both as a distributor and as a competitor, vertical strategic interaction and horizontal
strategic interaction effects result ([26] Sudhir, 2001).
The mathematical formulation of our model is given in the Appendix, and further details are available from the
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authors. The rest of this paper is organized as follows: first, we study the situation of high-quality
manufacturers[3] facing the decision of whether to produce a private label or not; then, we focus on the situation
of the low-quality manufacturer; finally, we offer our conclusions and limitations of our model.
Should a high-quality brand manufacturer make a private label?
When a retailer commits to launching a private label in a certain category, it puts pressure (the word used in a
private conversation by a former CEO of a major canned food manufacturer was "squeeze" as he very
graphically closed his fist and turned his wrist) on the manufacturers who have to compete for the new business
and fight the cannibalization of their own brands. Since the incremental competition posed by the private label is
known, manufacturers may prefer to internalize whatever profit opportunities remain in manufacturing for the
retailer rather than lose market share to the store brand and miss the chance of private label manufacturing. If
the manufacturer supplies the retailer, at least he can gain market share from the private label and coordinate
wholesale prices to minimize the effect of the private label on manufacturer's profits. The alternative for the
high-quality manufacturer would be to let the opportunity to supply the private label and let other manufacturers
make it and cannibalize his brand.
At first sight it would seem that the best course of action for the high-quality manufacturer is to yield to pressure
from the retailer and manufacture the private label in an effort to avoid third parties to encroach in his market
share and push down profits even further. Our economic model, however, suggests otherwise. In the case of a
high-quality manufacturer, the pressure posed by the threat of entry by the other manufacturer is strongest
when the store brand enters the market as a premium private label at a quality level above the high-quality
brand because the store brand would compete directly with the high quality brand, but not with the low quality
brand, and the low-quality manufacturer can be very aggressive in its private label pricing knowing it will have a
very small effect on sales of its existing brands. This is consistent with results from [30] Wedel and Zhang
(2004) who find that the intensity of competition between national brands and private brands is stronger than
among national brands. Conversely, if the store brand enters the market between the quality levels of existing
brands (a traditional private label) or below the low-quality brand (a generic), the low quality manufacturer
cannot be very aggressive in pricing the store brand because it would cannibalize its own brand. In fact, our
model shows that a high-quality manufacturer's profits are higher if it allows the low-quality brand manufacturer
makes the private label than if he makes it himself.
As a consequence, we have that a high-quality brand manufacturer is better off making the private label when it
is a premium private label ( HA *H >LA *H in our model), but not when the retailer launches a traditional private
label or a generic ( HM *H LM *H and HB *H LB *H ). The managerial implications are clear: a high-quality
manufacturer should make a private label only if the retailer positions it as a premium private label, and not for
generic or traditional private labels. This explains why Bird's Eye Foods, the largest manufacturer of branded
frozen vegetables in the USA and the last one with a significant non-branded presence, recently decided to
abandon its private label program. As its CEO Neil Harrison put it, "our non-branded frozen business, with its
lower margins, utilized resources which now can be freed up to drive brand growth and to compete more
aggressively with competitors who are not producing non-branded lines" ([18] Private Label Magazine , 2006).
The case of the low-quality brand manufacturer
Does the position of a low-quality manufacturer faced with the introduction of a private label mimic that of a high
quality manufacturer? The initial intuition could be the same, that a retailer's decision to introduce a private label
leaves it no option but to make it. For the low-quality manufacturer, the threat of entry from another brand is
strong independently of its positioning, but there are important nuances in this situation. When the store brand
enters the market either as a generic or as a traditional private label, the low-quality brand suffers from direct
competition, squeezed between the high-quality brand above and the generic brand below. In fact, our model
shows that when the store brand enters below the low-quality brand as a generic, the competition is so direct
that, given the chance to make the store brand, the low-quality manufacturer should drop its prices low enough
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to make the generic product unprofitable for the retailer. In the Personal Care category, for example, private
label market share is 5 percent and barely growing despite average prices 43 percent below national brands ([1]
A.C. Nielsen, 2005).
If the store brand enters in the middle as a traditional private label, it is the store brand that squeezes the lowquality brand out of the market. In this situation, the low-quality brand is trapped between the store brand at a
higher quality level above and the bottom of the market where consumers value quality too little to be served
profitably given the costs of quality. As a result, our model suggests that the best course of action for the lowquality manufacturer is to drop its own brand and become a private-label specialist. Cliffstar Corporation is the
largest private label juice manufacturer in the USA, and its clients include Costco, Wal-Mart and Safeway as
well as some national brands. It is, however, a private label specialist and, to our knowledge, does not mart its
own brands.
When the retailer decides to launch a premium private label, the decision for the low quality manufacturer is
rather straightforward. In this case, all or most of the competitive pressure from the store brand is born by the
high-quality brand and the best course of action for the low-quality manufacturer is to supply it since there is
little if any downside to it. Galerie, Inc., for example, manufactures Choxie, Target's premium private label for
chocolates, while its own manufacturer brands are positioned away from it.
Conclusions and limitations
The results of our model can be summarized in the following four propositions:

P1. A high-quality manufacturer will make a private label only if the retailer positions it as a premium private
label.

P2. A low-quality manufacturer will be willing to make a store brand, independently of its positioning.
P3. If the retailer positions the store brand below the low-quality brand, the low quality manufacturer will price it
out of the market.

P4. A low quality manufacturer who makes a store brand positioned between the existing brands will drop his
own brand and become a private-label specialist.
The above propositions beg the following question: if both the high quality manufacturer and the low quality
manufacturer are willing to make a premium private label (only the low quality manufacturer would be willing to
make a traditional private label or a generic), which one will the retailer choose? Our model shows that retailer's
profits are highest when the premium store brand is made by the high-quality manufacturer. This seems to be a
highly intuitive result: the high-quality brands are produced by the high-quality manufacturer. But it is interesting
to point out that this result is not a consequence of the skill set in each firm (as we mentioned earlier, both
brands can be of high absolute quality, and in many industries technologies are commercially available enabling
any manufacturer to produce any level of quality), but the result of the strategic interaction among
manufacturers and retailer. The following proposition summarizes this result:

P5. The retailer will choose the high-quality manufacturer to make a premium store brand.
Our model clearly shows that manufacturers of brand name products have a strong incentive to make private
labels, whether their brands are perceived in the market as high quality or low quality. Furthermore, we show
that the production of private brands by brand-name product manufacturers can be explained exclusively by the
strategic interplay of manufacturers and retailer, without resort to based on idle capacity, buffer between brands
or conditions posed by powerful manufacturers. As a result, our model contributes to explaining why private
label supply is becoming so pervasive among all kinds of manufacturers. Also, we show that retailers will
choose the high-quality manufacturer for its premium store brand and the low-quality manufacturer (who would
become a private label specialist if the retailer chooses to introduce its store brand at intermediate quality
levels) otherwise, and this decision is not based on the set of skills possessed by each manufacturing company.
However, there are other considerations not included in our framework. We intentionally do not model the
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retailer's store brand quality decision, since it would be closely related to its overall store quality image. In fact
should we make that decision endogenous to our model, the retailer would choose to market a low quality
(generic) private label made by the low quality manufacturer (who in turn would drop its own brand and become
a private label specialist) and a high quality manufacturer branded product. While this situation is far from
unknown in the marketplace, we cannot make that generalization because of the concerns expressed above.
Also, while our model can be easily extended to a larger number of manufacturers with the same conclusions,
our results could be different should we assume a larger number of competing retailers and different possible
private brand manufacturing arrangements. Indeed, a model including more than one retailer would have to
consider not only private labels but also exclusive brands (sold exclusively through a single retailer but
controlled by the manufacturer).
Footnote
1. Throughout this paper we will use "private label", "private brand" and "store brand" indistinctly to designate
brands sold exclusively by a retailer who controls their price, features and marketing, and manufactured by a
third party. Other names used in the literature and the industry are "own brand", "own label", "distributor brand",
"generic", "house brand" and "controlled brand". We do not consider so-called "exclusive brands", which are
marketed exclusively through a single retailer but controlled by the manufacturer.
2. [5] Corstjens and Lal (2000) report studies by PepsiCo and Coca-Cola revealing that national brands are
more profitable than store brands.
3. In the remainder of the paper we will use the expressions "high quality" and "low quality" manufacturer or
brand to refer to the relative position of companies and brands in terms of perceived quality (e.g. we will
describe as "low quality" a brand that is perceived as having lower quality than another even if its absolute level
of quality is very high, and "high quality" a brand that is perceived as having better quality than another, even if
it is of minimal quality in absolute terms).
References
1. A.C. Nielsen (2005), "The power of private labels 2005", available at:
www2.acnielsen.com/reports/documents/2005_privatelabel.pdf.
2. Boyle, M. (2003), "Brand killers: store brands aren't for losers anymore", Fortune, Vol. 148 No. 3, pp. 88-93.
3. Choi, C.J. and Shin, H.S. (1992), "A comment on a model of vertical product differentiation", The Journal of
Industrial Economics, Vol. 40 No. 2, pp. 229-31.
4. Corsten, D. and Kumar, N. (2005), "Do suppliers benefit from collaborative relationships with large retailers?
An empirical investigation of efficient consumer response adoption", Journal of Marketing, Vol. 69, July, pp. 8094.
5. Corstjens, M. and Lal, R. (2000), "Building store loyalty through store brands", Journal of Marketing
Research, Vol. XXXVII, August, pp. 281-91.
6. Cotterill, R.W. and Putsis, W.P. (2001), "Do models of vertical strategic interaction for national and store
brands meet the market test?", Journal of Retailing, Vol. 77, pp. 83-109.
7. Cotterill, R.W., Putsis, W.P. and Dhar, R. (2000), "Assessing the competitive interaction between private
labels and national brands", Journal of Business, Vol. 73 No. 1, pp. 109-37.
8. Dunne, D. and Narasimhan, D. (1999), "The new appeal of private labels", Harvard Business Review,
May/June, pp. 3-8.
9. Gabszewicz, J. and Thisse, J. (1979), "Price competition, quality and income disparities", Journal of
Economic Theory, Vol. 20, pp. 340-59.
10. Hoch, S.J. (1996), "How should national brands think about private labels?", Sloan Management Review,
Winter, pp. 89-102.
11. Hoch, S.J. and Banerji, S. (1993), "When do private labels succeed?", Sloan Management Review,
Summer, pp. 57-67.
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12. Kaven, W.H. and Call, D.L. (1967), "Private-label marketing in the ice-cream industry", Journal of Marketing,
Vol. 31 No. 1, pp. 35-8.
13. Lehmann-Grube, U. (1997), "Strategic choice of quality when quality is costly: the persistence of the highquality advantage", Rand Journal of Economics, Vol. 28, pp. 372-84.
14. Moorthy, S.K. (1988), "Product and price competition in a duopoly", Marketing Science, Vol. 7 No. 2, pp.
141-68.
15. Motta, M. (1993), "Endogenous quality choice: price vs quality competition", Journal of Industrial Economics,
Vol. 41, pp. 113-31.
16. Nandan, S. and Dickinson, R. (1994), "Private brands: major brand perspective", Journal of Consumer
Marketing, Vol. 11 No. 4, pp. 18-28.
17. Private Labels Manufacturers Association (2006), Private Labels Yearbook, Private Label Manufacturers
Association, New York, NY.
18. Private Label Magazine (2006), "Bird's Eye to exit PL business", July 27, available at:
www.privatelabelmag.com/news/readnews_test.cfm?article=434.
19. Quelch, J.A. and Harding, D. (1996), "Brands versus private labels: fighting to win", Harvard Business
Review, January/February, pp. 99-109.
20. Raju, J.S., Sethuraman, R. and Dhar, S.K. (1995), "The introduction and performance of store brands",
Management Science, Vol. 41 No. 6, pp. 957-78.
21. Ronnen, U. (1991), "Minimum quality standards, fixed costs and competition", Rand Journal of Economics,
Vol. 22 No. 4, pp. 490-504.
22. Sayman, S., Hoch, S.J. and Raju, J.S. (2002), "Positioning of store brands", Marketing Science, Vol. 21 No.
4, pp. 378-97.
23. Scott Morton, F. and Zettelmeyer, F. (2001), "The strategic positioning of store brands in retailermanufacturer negotiations", working paper, Haas School of Business, University of California at Berkeley,
Berkeley, CA.
24. Sethuraman, R. (2003), "Measuring national brands' equity over store brands", Review of Marketing
Science, Vol. 1, available at: http://222.bepress.com/romsjournal/vol1/iss1/art2.
25. Shaked, A. and Sutton, J. (1982), "Relaxing price competition through product differentiation", Review of
Economic Studies, Vol. 49, pp. 3-13.
26. Sudhir, K. (2001), "Structural analysis of manufacturer pricing in the presence of a strategic retailer",
Marketing Science, Vol. 20 No. 3, pp. 244-64.
27. Tirole, J. (1988), The Theory of Industrial Organization, MIT Press, Cambridge, MA.
28. Wang, X.H. (2003), "A note on the high-quality advantage in vertical differentiation models", Bulletin of
Economic Research, Vol. 55 No. 1, pp. 91-9.
29. Wauthy, X. (1996), "Quality choice in models of vertical differentiation", Journal of Industrial Economics, Vol.
44, pp. 345-53.
30. Wedel, M. and Zhang, J. (2004), "Analyzing brand competition across subcategories", Journal of Marketing
Research, Vol. XLI, November, pp. 448-56.
31. Wittner, P. (2003), Growth Strategies in Premium and Indulgent Food and Drinks: Increasing Profitability
and Market Share, Reuters, London.
Appendix
Appendix. The model
First, we consider a game where the retailer does not carry a private label. We consider a market made of two
manufacturing firms, H and L, each of them selling a single product of perceived quality sH and sL , respectively,
under their company brands and through a common retailer R who acts as a local monopolist. Since the
positioning in vertical differentiation models has been extensively studied before ([3] Choi and Shin, 1992; [9]
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Gabszewicz and Thisse, 1979; [13] Lehmann-Grube, 1997; [15] Motta, 1993; [25] Shaked and Sutton, 1982;
[29] Wauthy, 1996) and is not the focus of our article, we assume product qualities are exogenously determined.
We shall assume that 0 sL <sH 1, i.e. we have a low-quality firm and a high-quality firm. We shall also assume
that (pH /sH )>(pL /sL ) to guarantee consumers' bounded rationality. Both manufacturers have the same marginal
production costs k per unit of perceived quality, so that production (and, since we are considering perceived
quality, marketing) costs for each product are, respectively, ksH and ksL . (This cost structure can also be
interpreted as zero marginal production costs, and k is the cost of conveying the quality of the product via
packaging and merchandising.) Fixed costs are assumed to be zero. They play a two-stage non-cooperative
game. In the first stage of the game, the manufacturers decide their wholesale prices, wL and wH , la Bertrand,
and in the second stage the retailer chooses retail prices, pL and pH , given wholesale prices in a vertical-Nash
fashion that seems to be common when private label brands are involved ([6] Cotterill and Putsis, 2001).
We use a demand model inspired by [27] Tirole (1988) that is common in the literature on vertical differentiation
([3] Choi and Shin, 1992; [13] Lehmann-Grube, 1997; [14] Moorthy, 1988; [21] Ronnen, 1991; [28] Wang, 2003).
Consumers have heterogeneous tastes and are uniformly distributed along a line of length 1 and density 1
according to their preference for quality [straight theta] . All consumers prefer a higher quality product to a lower
quality product, but a consumer with a higher [straight theta] will have a stronger preference for quality. Her
utility is given by [straight theta]s -p when a unit of a brand with quality s is bought at price p , and zero if she
makes no purchase. A consumer positioned at [straight theta] either buys one unit of the product from the one
brand that offers the best price/quality combination or does not buy at all if none of the brands offer positive
utility levels. The potential market size is therefore 1, and it may or may not be fully covered.
Given the firms' quality choices and their prices, the marginal consumer who is indifferent between buying brand
L and brand H is given by: Equation 1 [Figure omitted. See Article Image.] and the marginal consumer who is
indifferent to buying brand L or not buying at all is given by: Equation 2 [Figure omitted. See Article Image.]
From equations (A1) and (A2), the demands for brand H and brand L are given, respectively, by: Equation 3
[Figure omitted. See Article Image.] Equation 4 [Figure omitted. See Article Image.] Profits for both
manufacturers and the retailer are given by the following expressions Equation 5 [Figure omitted. See Article
Image.] Equation 6 [Figure omitted. See Article Image.] Equation 7 [Figure omitted. See Article Image.] Solving
recursively, the first-order conditions for retailer profit maximization in the second stage are given by R /pH
=0 and R /pL =0, which yield equilibrium retail prices as: Equation 8 [Figure omitted. See Article Image.]
Equation 9 [Figure omitted. See Article Image.] Solving the first-order conditions for manufacturer prices in the
first stage H /wH =0 and L /wL =0, and substituting in equations (A5)-(A9) results in the following prices
(both wholesale and retail) and profits: Equation 10 [Figure omitted. See Article Image.] Equation 11 [Figure
omitted. See Article Image.] Equation 12 [Figure omitted. See Article Image.] Equation 13 [Figure omitted. See
Article Image.] Equation 14 [Figure omitted. See Article Image.] Equation 15 [Figure omitted. See Article Image.]
Equation 16 [Figure omitted. See Article Image.] Now let us assume that the retailer decides to introduce a
competing product under a private label, manufactured by one of the two incumbent companies. Consistent with
the three-tier (generic, traditional and premium) approach to store brands commonly used in the retail industry,
he may decide to introduce the product at three different (and exogenously determined) quality levels:
above the high-quality brand (sH <sR );
between the existing brands (sL <sR <sH ); and
below the low-quality brand (sR <sL ).
We realistically assume the private label cannot be identical to any of the existing brands, but we accept that
differences may be minimal. Reflecting a common industry practice, we also assume the manufacturer of the
private label passes through 100 percent of the manufacturing costs to the retailer, so that the wholesale price (

wR ) represents the fee for manufacturing services and the total unit cost for the retailer is wR +ksR . Here we are
assuming the cost of quality is the same for the retailer and the manufacturers. Finally, for the sake of simplicity
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but also consistent with corporate practice, we also assume that the retailer chooses only one of the
manufacturers to supply the private label in the category.
With three brands in the market, and depending on the position chosen by the retailer, the new demand
functions become as shown in Table AI [Figure omitted. See Article Image.]. We use the left subscripts H and L
to denote the production of the private label by manufacturer H and L, and left superscripts A, M and B to
denote the positioning of the store brand above, in the middle or below the incumbent brands, respectively.
The retailer's profit function becomes: Equation 17 [Figure omitted. See Article Image.] and the manufacturers'
profit functions are given by: Equation 18 [Figure omitted. See Article Image.] Equation 19 [Figure omitted. See
Article Image.] if firm H manufactures the private label for the retailer, and by the following expressions if firm L
makes the private label: Equation 20 [Figure omitted. See Article Image.] Equation 21 [Figure omitted. See
Article Image.] The sequence of decisions is as follows:
Stage 1. Manufacturers exogenously determine their brand quality levels and the retailer decides the quality of
its private label (also exogenously).
Stage 2. The retailer chooses a manufacturer for its private label.
Stage 3. Manufacturers choose wholesale prices (wH , wL , wR ) to maximize profits.
Stage 4. Retailer chooses retail prices (pH , pL , pR ) to maximize total category profits.
Corresponding author
J. Tomas Gomez-Arias can be contacted at: tgomez@stmarys-ca.edu
AuthorAffiliation
J. Tomas Gomez-Arias, St Mary's College of California, Moraga, Calfornia, USA
Laurentino Bello-Acebron, School of Economics and Business Science, University of A Corua, A Corua,
Spain
Illustration
Equation 1
Equation 2
Equation 3
Equation 4
Equation 5
Equation 6
Equation 7
Equation 8
Equation 9
Equation 10
Equation 11
Equation 12
Equation 13
Equation 14
Equation 15
Equation 16
Equation 17
Equation 18
Equation 19
Equation 20
Equation 21
Table AI: Demand functions under alternative private label positions

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Materia: Studies; Brands; House brands; Retailing industry; Market research; Market strategy;
Clasificacin: 9130: Experimental/theoretical; 7100: Market research; 8390: Retailing industry
Ttulo: Why do leading brand manufacturers supply private labels?
Autor: J. Tomas Gomez-Arias; Bello-Acebron, Laurentino
Ttulo de publicacin: The Journal of Business & Industrial Marketing
Tomo: 23
Nmero: 4
Pginas: 273-278
Ao de publicacin: 2008
Fecha de publicacin: 2008
Ao: 2008
Editorial: Emerald Group Publishing, Limited
Lugar de publicacin: Santa Barbara
Pas de publicacin: United Kingdom
Materia de publicacin: Business And Economics--Marketing And Purchasing
ISSN: 08858624
Tipo de fuente: Scholarly Journals
Idioma de la publicacin: English
Tipo de documento: Feature
DOI: http://dx.doi.org/10.1108/08858620810865852
ID del documento de ProQuest: 222060511
URL del documento: http://ezproxy.puc.cl/docview/222060511?accountid=16788
Copyright: Copyright Emerald Group Publishing Limited 2008
ltima actualizacin: 2014-05-20
Base de datos: ABI/INFORM Global

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