Friday, April 24, 2015
Claire Chambolle (INRA-UR1303 ALISS), Clemence Christin (Normandie Université, UCBN, CREM-UMR CNRS 6211) and Guy Meunier (INRA-UR1303 ALISS) ask Optimal production channel for private labels: Too much or too little innovation?
ABSTRACT: We analyze the impact of the private label production channel on innovation. A retailer may either choose to integrate backward with a small firm (insourcing) or rely on a national brand manufacturer (outsourcing) to produce its private label. The trade-off between insourcing and outsourcing strategies is a choice between too much or too little innovation (i.e. quality investment) on the private label. When insourcing, an outside-option effect leads the retailer to over-invest to increase its buyer power. When outsourcing, a hold-up effect leads to under-investment. In addition, selecting the national brand manufacturer may create economies of scale that spur innovation.