Strategic Competition Between Private Labels and National Brands in a Vertically Linked Market

Over the past decades, the rapid emergence of private labels (PL) has created stiff competition for many established manufacturers of national brands (NB). Retailers are using PL products as a competitive weapon against NB. The present study develops and tests different theoretical models of competition under different retailer-manufacturer production arrangements for private labels using the Non-Nested Model Comparison (NNMC) approach and their impact on the pricing strategies of PLs and NBs in the Canadian retail market. The theoretical model shows that a retailer earns the highest profit when it behaves as a leader and makes the least profit when it behaves as a follower; a similar relationship holds for the NB manufacturer under different PL production arrangements. The total industry profit is the highest when the retailer and NB manufacturer behaves in a Bertrand Nash manner. Empirical results of the study show no consistent pattern of competitive interaction under various production arrangements of PL products.