National Brand's Incentive to Offer Premium Private Labels

As Private Labels (PLs) become proliferated, retailers are offering multitier PLs and introducing premium PLs (PPLs) that are high in quality and, in some cases, even quality-equivalent to national brands (NBs). PPLs are often supplied by the manufacturers of corresponding NBs (i.e., dual branders), whereas many economy PLs (EPLs) are supplied by dedicated PL manufacturers. We examine an NB manufacturer's incentive to supply PPL despite its potential of cannibalizing the company's own NB. Our analysis incorporates the attraction effect of PPL on NB, which stems from consumers exhibiting context-dependent preferences. Such effect makes it profitable for the manufacturer and retailer to supply quality-equivalent PPL.