Store loyalty, bargaining power and the private label production issue

One of many explanations offered for the rise of private labels (PLs) is that they increase the bargaining power of the retailer. The prior question of the PL production assignment has not been analysed in an economic framework. The retailer can either entrust the production of his PL to the national brand (NB) manufacturer at a low unit cost, with the disadvantage that both products (NB and PL) are held by the same agent, or he can choose a firm from the competitive fringe with a higher unit production cost. In a framework where loyalty (presence of store-switching and brand-switcing consumers) and bargaining strength count, we show that the retailer will assign his PL production to the NB manufacturer when the latter's bargaining power is low. However, a higher consumer loyalty for the NB can reverse theretailer's decision.