Private Labels: Facilitators or Impediments to Supply Chain Coordination

We consider a retailer’s decision of whether to develop an internally produced, private label version of a national brand and the role that this decision plays in coordinating the supply chain. Our model assumes that the perceived quality of the private label is lower than that of the national brand, and we allow for the two products to have different marginal costs. We further allow for a fixed development cost that the retailer must incur to develop private label capability, and distinguish two types of private labels depending upon whether they would or would not be developed as product line extensions by a vertically integrated supply chain. We refer to these two types as first-best (FB) and non-first-best (NFB) product line extensions, respectively. When the private label can be characterized as a NFB product line extension, its development creates adverse cannibalization effects, yet it also helps to mitigate the effects of double marginalization with respect to the national brand. We characterize the conditions under which the retailer will develop private label capability, and distinguish among the conditions under which this is either beneficial or detrimental to the overall performance of the supply chain.