Pricing a Private Label: The National Brand's Wholesale Price Is Irrelevant

We build a model of quality-price competition between a national brand manufacture and a retailer who introduces a private label. The manufacturer decides the wholesale price of his national brand, and the retailer optimizes her combined profit using a product-line pricing. We find that the wholesale price of the national brand is not relevant to the optimal pricing decision of the private label. Instead, the price solely depends on the relative quality of the private label against the national brand. The national brand's wholesale and retail prices decrease due to the new competition, but its demand level stays the same. The market coverage of the combined demand is twice the initial NB-only demand, and the total channel profit increases as a result.