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Product Design and Decision Rights in Vertical Structures

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  • Dubois, Pierre
  • Jullien, Bruno

Abstract

The paper argues that the emergence of private labels can be partially explained by the new information technologies available at the retail level. In our approach, the owner of a brand has ìdecision rightsîon product design, while the details of the production and distribution are left to contractual negotiation. Manufacturers have privileged information about the cost of improving quality, while distributors have private information on the impact of quality on demand. We show that ownership of the brand should be allocated to the party with a relative informational advantage. In particular, if the information of the distributor improves due to a technological shock on data collection and information management, it may become optimal for the distributor to introduce its own brand, rather than to distribute a manufacturerís brand.

Suggested Citation

  • Dubois, Pierre & Jullien, Bruno, 2016. "Product Design and Decision Rights in Vertical Structures," TSE Working Papers 16-730, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:4832
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    References listed on IDEAS

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    1. Sergio Meza & K. Sudhir, 2010. "Do private labels increase retailer bargaining power?," Quantitative Marketing and Economics (QME), Springer, vol. 8(3), pages 333-363, September.
    2. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    3. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-365, June.
    4. Fiona Scott Morton & Florian Zettelmeyer, 2004. "The Strategic Positioning of Store Brands in Retailer--Manufacturer Negotiations," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 24(2), pages 161-194, March.
    5. Gabrielsen, Tommy Staahl & Sorgard, Lars, 2007. "Private labels, price rivalry, and public policy," European Economic Review, Elsevier, vol. 51(2), pages 403-424, February.
    6. William Comanor & Patrick Rey, 2000. "Vertical Restraints and the Market Power of Large Distributors," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 17(2), pages 135-153, September.
    7. Bergès-Sennou Fabian & Bontems Philippe & Réquillart Vincent, 2004. "Economics of Private Labels: A Survey of Literature," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 2(1), pages 1-25, February.
    8. Wouter Dessein, 2002. "Authority and Communication in Organizations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(4), pages 811-838.
    9. Christophe Bontemps & Valérie Orozco & Vincent Réquillart, 2008. "Private Labels, National Brands and Food Prices," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(1), pages 1-22, August.
    10. Mills, David E, 1995. "Why Retailers Sell Private Labels," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 509-528, Fall.
    11. Pradeep K. Chintagunta & André Bonfrer & Inseong Song, 2002. "Investigating the Effects of Store-Brand Introduction on Retailer Demand and Pricing Behavior," Management Science, INFORMS, vol. 48(10), pages 1242-1267, October.
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    Cited by:

    1. Iván Valdés de la Fuente & Gonzalo Escobar Elexpuru, 2022. "Is it rational for a large-retailer to sell an own-brand product similar to the branded product of a large manufacturer? A Vertical Product Differentiation Model," Revista Desarrollo y Sociedad, Universidad de los Andes,Facultad de Economía, CEDE, vol. 90(3), pages 77-109, February.

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    Keywords

    store brand; private label; asymmetric information; vertical structures; product design; decision rights;
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