Private Label Positioning:

Among major benefits private labels bring to the retailer, we focus on the retailer’s ability to coordinate the prices of both the national brand and its store brand counterpart. By using product-line pricing, the retailer can exploit the differentiated nature of the two brands. This paper investigates the retailer’s problem of positioning her private label and the subsequent pricing issues. While most previous studies concentrate either on vertical (i.e., quality) or horizontal (i.e., trade dress) differentiation, we view the private label’s differentiation from the national brand as a combination of the two. In contrast to the location theory literature, which generally suggests maximum differentiation in both dimensions as the best strategy for the retailer, our results are mixed: when the two dimensions are considered separately, the retailer’s profit is maximized by minimum vertical differentiation and maximum horizontal differentiation. However, when the two dimensions are correlated, the retailer is generally better off increasing its quality up to the level of the national brand, provided that the quality cost is negligible. We also extend the model to the case of two national brands, and show that the private label’s optimal level of differentiation depends on the existing differentiation between the two brands.