The Strategic Effect of Private Label in a Vertical Bargaining Model

Private label products have been studied ex tensively and theoretical frameworks were developed to show private label products lend their retailers bargaining power over factory brands. Because of unobservable fact ory or wholesale prices empirical evidence has been lacking. This paper, using an efficient bargaining model in a multilateral bargaining setup and IRI brand level data, pr ovides for the first time empirical evidence supporting the existence of such bargaining power by retailers with strong private labels. Estimation results show that the retailers in the Boston fluid milk market are able to leverage their private label products to ga in concessions when negotiating wholesale prices with two major factory brands. Th is suggests that the relationship between retailers and milk processors is competitive even though the retailers enjoy channel power