The strategic role of private labels on retail competition

Abstract

We investigate the strategic role of private labels in limiting retail competition. Private labels are unique differentiators for retailers. By launching and credibly committing to a strong private label program, a strong retailer can limit the market potential for competing retailers. Consequently, weaker retailers may not be able to meet threshold profits and exit the market. We derive the private label shares needed to induce exit. A model implication is that the private label share required to induce exit increases with increasing national brand margins. We also conduct an empirical analysis and find evidence supporting the propositions. Combining Dominick's store level data with Zip Code Business Patterns data, we find that at the zip code level, the private label share affects the number of stores competing in the market.