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Optimal Production Channel for Private Labels: Too Much or Too Little Innovation?

Author

Listed:
  • Claire Chambolle

    (UR 1303 Alimentation et Sciences Sociales - INRA - Institut National de la Recherche Agronomique - ALISS - Alimentation et Sciences Sociales, Département de l'Economie - X - École polytechnique)

  • Clémence Christin

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Guy Meunier

    (UR 1303 Alimentation et Sciences Sociales - INRA - Institut National de la Recherche Agronomique - ALISS - Alimentation et Sciences Sociales, X - École polytechnique)

Abstract

We analyze the impact of the private label production channel on innovation. A retailer may either choose to integrate backward with a small firm (insourcing) or rely on a national brand manufacturer (outsourcing) to produce its private label. The trade-off between insourcing and outsourcing strategies is a choice between too much or too little innovation (i.e., quality investment) on the private label. When insourcing, an outside-option effect leads the retailer to overinvest to increase its buyer power. When outsourcing, a hold-up effect leads to underinvestment. In addition, selecting the national brand manufacturer may create economies of scale that spur innovation.

Suggested Citation

  • Claire Chambolle & Clémence Christin & Guy Meunier, 2015. "Optimal Production Channel for Private Labels: Too Much or Too Little Innovation?," Post-Print halshs-01242601, HAL.
  • Handle: RePEc:hal:journl:halshs-01242601
    DOI: 10.1111/jems.12098
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01242601
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    References listed on IDEAS

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    1. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    2. 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.
    3. Soberman, David A. & Parker, Philip M., 2004. "Private labels: psychological versioning of typical consumer products," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 849-861, June.
    4. Daniel P. O'Brien & Greg Shaffer, 1997. "Nonlinear Supply Contracts, Exclusive Dealing, and Equilibrium Market Foreclosure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 755-785, December.
    5. repec:eee:ijrema:v:30:y:2013:i:4:p:343-357 is not listed on IDEAS
    6. Mills, David E, 1995. "Why Retailers Sell Private Labels," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 509-528, Fall.
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    Cited by:

    1. Inderst, Roman & Jakubovic, Zlata & Jovanovic, Dragan, 2015. "Buyer Power and Functional Competition for Innovation," MPRA Paper 61214, University Library of Munich, Germany.
    2. Claire Chambolle & Sofia Villas-Boas, 2007. "Buyer Power through Producer's Differentiation," Working Papers hal-00243058, HAL.
    3. Claire Chambolle & Clémence Christin, 2017. "New Product Introduction and Slotting Fees," Working Papers hal-01458949, HAL.
    4. Chambolle, Claire & Villas-Boas, Sofia B., 2015. "Buyer power through the differentiation of suppliers," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 56-65.

    More about this item

    Keywords

    Private label; vertical relations; buyer power; innovation;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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