Private Labels Strategy, Retail Profitability and Bargaining Power in the Fluid Milk Market

Abstract

Abstract This paper studies the competition between private labels and the role of private labels in determining the bargaining outcomes between retailers and manufacturers as well as retailer profitability in the fluid milk market. We differentiate private labels from different retailers and develop a structural model of demand and a Nash-in-Nash vertical bargaining model of supply. Using 2004–2011 Nielsen Homescan data at monthly-county level, we estimated the average bargaining power of retailers and how various factors influence their bargaining power with a random-coefficient discrete choice model of demand. With the full bargaining model specification, this paper then conducts simulations to isolate the role of private label in bargaining and retailer profitability, comparing the effectiveness of alternative private label strategies. Results indicate private label milk from different retailers are close competitors and retailers have more bargaining power than manufacturers. Further, factors such as the manufacturer size, private label share, and their private label position can significantly affect retailers’ bargaining power. Moreover, the counterfactual analysis shows that lowering private label prices and other private label strategies such as private label program expansion and retailer advertising could not only increase their profitability but also allow retailers to benefit from the bargaining with manufacturers.