Three Essays on Private Labels, Product Quality and The Retailer's Bargaining Power

Abstract

The first chapter of this thesis studies the motivations of a retailer to launch a private label product in an environment where consumers do not know the quality of the product before consumption. I show that the launch of the private label product can be a form of brand stretching, with the sales of a national brand acting as a bond to ensure that the retailer sells a private label product of high quality. Consequently, the retailer would carry and sell the national brand product even in situations where it would not have done so under perfect information. In addition, I also demonstrate that other motivations for launching a private label product, namely to strengthen the retailer's bargaining position and to engage in market segmentation, are not fundamentally affected by the presence of asymmetric information. In the second chapter, an overlapping-generation model is constructed to investigate the motivations of a retailer to launch a private label product in an environment of asymmetric information about its quality. I focus on the case where the national brand product is too costly to be offered by the retailer under perfect information. I show that, under imperfect information, the national brand product can be used as a signal for the quality of the private label product in a long term even though its cost is very high relative to that of the private label product. In the final chapter, I use data on a large super-market chain to test two hypotheses regarding the use of private labels by a retailer that also offers national brands. The first hypothesis is whether private labels enhance the retailer's bargaining power vis-a-vis its manufacturers. The second hypothesis is whether the retailer strategically sets its prices to favor its private labels. I find that private labels indeed enable the retailer to receive lower wholesale prices with its national brand manufacturers. Moreover, private labels lead to an increase in retail prices for the national brands in support of the strategic retail pricing hypothesis. I also use a simulation exercise to evaluate the benefit of private labels to the consumers.