An Empirical Investigation of Private Label Supply by National Label Producers

Private labels (PLs) are ubiquitous in several categories, including groceries, apparel, and appliances. However, existing empirical work has not examined the differential impact of various upstream supply arrangements for PL products or the strategic motives for PL supply. To do so requires one to model the interaction between private and national label (NL) products both upstream and downstream while accounting for strategic behavior on the part of manufacturers and retailers and retaining essential differences between NL and PL products. We build a model that satisfies these requirements and lets us answer our two research questions: First, can an NL firm profit from being an outsourced PL supplier? Second, what are the upstream and downstream impacts of different PL supply arrangements? We answer these questions by modeling private labels as homogenous products at wholesale, but as differentiated products at retail. In contrast, national label products are differentiated at both wholesale and retail levels. Using structural model estimates for fluid milk in a major metropolitan area, we conduct three counterfactual experiments. We find that both NL producers and retailers profit from adding private labels. We also find that a vertically integrated supply of PL leads to lower prices for end consumers.