Retailers procure private labels from several sources including national brand manufacturers, dedicated private label manufactures (often overseas or regional), and own manufacturing facilities.2 In the first case, the supplier utilizes its expertise and excess capacity to supply PLs. In the other two cases, the suppliers are dedicated to manufacturing PLs for single or multiple retailers. Consumers generally consider PLs as value substitutes of the corresponding national brands. As private labels become proliferated, more retailers are introducing premium PLs that oftentimes replace marginal national brands. It is natural to assume that the PL sourced from the excess capacity of the NB manufacturer is identical to the corresponding NB except for the branding and packaging. In this paper, we examine a retailer’s problem of tiered PL sourcing, in which a premium PL is supplied such a NB manufacturer (dual brander), and an economy PL is supplied by a dedicated PL supplier. We decompose the value of a product into three components: the NB’s brand equity, the retailer’s reputation, and the intrinsic quality of the NB. In this distribution channel, the NB’s wholesale and retail prices are determined by the traditional bilateral Nash game. However, the premium PL’s transfer price is determined through a profit-sharing negotiation between the channel members. Based on this game scenario, we build a model of price competition, given the quality, brand equity, and retailer reputation parameters, in order to examine strategic implications of the parameters to the equilibrium prices. In our bilateral pricing game, the NB manufacture and the retailer play a Nash pricing game, augmented by a profit sharing negotiation for the premium PL. In the negotiation process, the retailer’s negotiation power over the NB manufacture is reflected in the ratio of incremental profits from the premium PL. From an equilibrium-negotiation solution, we derive profit implications of each of the value components as well as the negotiation power of the retailer. Among several findings, the most interesting takeaway is that, even if the retailer holds a strong negotiation power, it is optimal for the retailer to leave some chips on the table for the NB manufacturer during the transfer pricing negotiation.

• S. Chan Choi(Rutgers Business School. USA)