Private labels and product quality under asymmetric information

Contrary to the existing theories of private label (PL) products, we demonstrate that the introduction of a PL product by a retailer may improve the profit of the supplier of a competing national‐brand (NB) product. Our theory is built on two main elements. First, the introduction of a PL product may expand the total demand for the products carried by the retailer and thus enlarge the joint profit to be split between the retailer and the supplier of the NB product. Second, in an environment where consumers do not know the quality of the PL product, the NB serves as a bond to assure consumers that the retailer sells high‐quality products only. This quality assurance enhances the joint profit generated by the introduction of the PL product, which, in conjunction with the weakening of the retailer's bargaining position caused by asymmetric information, may enable the NB supplier to earn a larger profit than in the absence of the PL product.