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Private Labels, Rent Shifting And Consumer Welfare

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    This paper investigates a retailer's decision to introduce a private label and asks how the retailer's access to a private label may affect the pricing of substitute national brands. We consider a model with two vertically differentiated national brand manufacturers that negotiate sequentially with a monopolist retailer over two-part tariffs. We find that when the retailer decides to introduce a private label, this generates a price increase for one of the two national brands. Moreover, when we endogenise the order of negotiations, we find that i) the retailer?s private label is always introduced, and ii) the private label always causes a price increase for the high-quality national brand only. In our model, this price increase does not occur due to a price discrimination effect, as in Gabrielsen and Sørgard (2007) ["Private labels, price rivalry, and public policy", European Economic Review, (51), 403-424], but as a result of a rent-shifting effect. The welfare implications of private label introduction are discussed.

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    File URL: https://www.uib.no/filearchive/wp.02.12.pdf
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    Paper provided by University of Bergen, Department of Economics in its series Working Papers in Economics with number 02/12.

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    Length: 65 pages
    Date of creation: 31 Jan 2012
    Date of revision:
    Handle: RePEc:hhs:bergec:2012_002
    Contact details of provider: Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
    Phone: (+47)55589200
    Fax: (+47)55589210
    Web page: http://www.uib.no/econ/en
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    1. Ward, Michael B. & Shimshack, Jay P. & Perloff, Jeffrey M. & Harris, J. Michael, 2002. "Effects of the private-label invasion in food industries," MPRA Paper 22186, University Library of Munich, Germany.
    2. Narasimhan, Chakravarthi & Wilcox, Ronald T, 1998. "Private Labels and the Channel Relationship: A Cross-Category Analysis," The Journal of Business, University of Chicago Press, vol. 71(4), pages 573-600, October.
    3. Bernheim, B.D., 1992. "Exclusive Dealing," Harvard Institute of Economic Research Working Papers 1622, Harvard - Institute of Economic Research.
    4. Gabrielsen, Tommy Staahl & Sørgard, Lars, 2000. "Private Labels, Price Rivalry, and Public Policy," University of California at Santa Barbara, Economics Working Paper Series qt8wh900ks, Department of Economics, UC Santa Barbara.
    5. 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.
    6. Bontemps Christophe & Orozco Valerie & Réquillart Vincent & Trevisiol Audrey, 2005. "Price Effects of Private Label Development," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 3(1), pages 1-18, February.
    7. Fabian Bergès-Sennou, 2006. "Store loyalty, bargaining power and the private label production issue," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 33(3), pages 315-335, September.
    8. André Bonfrer & Pradeep K. Chintagunta, 2004. "Store Brands: Who Buys Them and What Happens to Retail Prices When They Are Introduced?," Review of Industrial Organization, Springer, vol. 24(2), pages 195-218, 03.
    9. Christophe Bontemps & Valérie Orozco & Vincent Réquillart, 2008. "Private Labels, National Brands and Food Prices," Review of Industrial Organization, Springer, 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 509-28, Fall.
    11. Mills, David E, 1999. "Private Labels and Manufacturer Counterstrategies," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 26(2), pages 125-45, June.
    12. Marx, Leslie M. & Shaffer, Greg, 2007. "Rent shifting and the order of negotiations," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 1109-1125, October.
    13. Bontems, Philippe & Monier-Dilhan, Sylvette & Requillart, Vincent, 1999. "Strategic Effects of Private Labels," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 26(2), pages 147-65, June.
    14. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
    15. 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.
    16. Sullivan, Mary W, 1997. "Slotting Allowances and the Market for New Products," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 461-93, October.
    17. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
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