EXPRESS: Private Labels and Retailer Profitability: Bilateral Bargaining in the Grocery Channel

The authors examine the role of store-branded, “private label” products in determining retailers’ profits. Exploiting a novel setting in which a patent expiration concided with private-label entries, they estimate a structural model of demand and supply-side bargaining to identify primary determinants of retailer gains from private labels. They find private-label entry causes a significant and heterogeneous impact on retailer profits. Utilizing unique data on the identity of private-label manufacturers, they show a stronger retailer bargaining position (disagreement payoffs) vis à vis private-label supplier leads to a larger retailer gain. These gains arise both through improved direct profits from the private label, and indirectly through a better bargaining outcome on national-brand products. These results highlight the importance of supply-side arrangements in determining private-label profits, and the private label’s role as bargaining leverage against national brands. The authors also quantify how the retailer's “brand” equity affects the profitability of its private label.