Abstract
Over the past decades, the rapid emergence of private labels (PL) has created stiff competition for many established manufacturers of national brands (NB). Retailers are using PL products as a competitive weapon against NB. The present study develops and tests different theoretical models of competition under different retailer-manufacturer production arrangements for private labels using the Non-Nested Model Comparison (NNMC) approach and their impact on the pricing strategies of PLs and NBs in the Canadian retail market. The theoretical model shows that a retailer earns the highest profit when it behaves as a leader and makes the least profit when it behaves as a follower; a similar relationship holds for the NB manufacturer under different PL production arrangements. The total industry profit is the highest when the retailer and NB manufacturer behaves in a Bertrand Nash manner. Empirical results of the study show no consistent pattern of competitive interaction under various production arrangements of PL products.
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