A theory of private branding and its implication for the relative competitiveness of foreign versus domestic manufacturers

This dissertation develops and tests a new theory of private branding, a business practice under which manufacturers' products are sold to consumers under retailers' brands. The theory first argues that consumers' satisfaction with a product depends on both the performance of the manufacturer and that of the retailer. However, satisfied (or dissatisfied) consumers often cannot tell whether to attribute their satisfaction (or dissatisfaction) to the manufacturer or to the retailer, and therefore may reward (or punish) the manufacturer for the retailer's contribution to their satisfaction (or dissatisfaction), or vice versa. I call this condition "performance inseparability." Performance inseparability will trigger manufacturer-retailer conflicts and lead to an increase in intrachannel coordination costs. Although the manufacturer can impose contractual restraints on the retailer or even integrate forward into retailing to solve performance inseparability, I argue that shifting the branding of the product from the manufacturer to the retailer is a third solution. Private branding can reduce or even eliminate manufacturer-retailer conflicts caused by performance inseparability, save on intrachannel coordination costs, and therefore improve the distribution efficiency of a product.I also use the theory to explain why a large number of foreign products are sold in the U.S. under private brands. I argue that a mutual information gap between foreign manufacturers and U.S. consumers has created a higher level of performance between U.S. retailers and foreign suppliers. At the same time, solving performance inseparability across national borders is more costly than doing so within a country. Both factors hurt the competitiveness of foreign manufacturers. As private branding is an efficient solution to performance inseparability, it can make a larger improvement in distribution efficiency for foreign products than for domestic products. Therefore, private branding can improve the competitiveness of foreign manufacturers relative to their U.S. competitors. This explains why a large portion of foreign products are sold in the U.S. under private brands.I tested the theory of private branding by using a sample of 747 products stocked by a national retail chain. Industry- and product-level data were also collected from various sources to operationalize the dependent and independent variables in a binomial logistic model. I found that a higher level of performance inseparability is associated with a higher likelihood that a product is privately branded.Through another binomial logistic model, I also tested the impact of private branding on foreign sourcing and found that a privately branded product is more likely to be sourced from foreign suppliers. I also found that in addition to production and distribution costs, intrachannel coordination costs related to performance inseparability have a significant impact on the relative competitiveness of foreign manufacturers. These results confirm that private branding enhances the relative competitiveness of foreign manufacturers.Finally, I applied a two-step model to further investigate the interaction between the retailer's branding and sourcing decisions. This two-step model has allowed me to analyze the retailer's sourcing behavior under the two branding scenarios without suffering from the so-called selectivity bias. I found that the retailer does not behave the same way in sourcing private brand products as in sourcing manufacturer brand products. The results show that performance inseparability interacts with the branding status of a product in determining the probability of foreign sourcing.U of I OnlyETDs are only available to UIUC Users without author permissio