Private Labels and Retailer Profitability: Bilateral Bargaining in the Grocery Channel

We examine the role of store branded "private label" products in determining bargaining outcomes between retailers and manufacturers in the single-serve brew-at-home coffee category. Exploiting a novel setting in which the dominant, single-serve technology was protected by a patent that prevented private label entry, we develop a structural model of demand and supply-side bargaining and seek to quantify the impact of private labels on retailer profits. To quantify the benefits of private label introduction, we decompose their impact into the direct profits (from adding an additional product) and the bargaining benefit on branded products (from increasing retailer's bargaining leverage), netting out the business stealing effects on incumbent branded products. We find that bargaining outcomes are driven primarily by bargaining leverage, while bargaining ability is relatively symmetric between retailer and manufacturer. Moreover, the impact of bargaining leverage is substantial: increased bargaining leverage accounts for roughly 20% of the overall benefit of private label introduction, which is itself on the order of 10% of pre-introduction profits. Finally, we find that private labels are beneficial to all retailers, but some retailers gain much more than others.