Why Retailers Sell Private Labels

This paper interprets private label marketing as a retailer instrument for overcoming the double‐marginalization problem inherent in the distribution of well‐known manufacturer brands. Retailers with some degree of market power carry private label substitutes for popular national brands in order to capture more profit from the vertical structures they share with brand manufacturers. The net effect of private label marketing is to improve the performance of distribution channels. After presenting a formal model and deriving analytical results, the paper gathers some empirical evidence that supports these results.