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Optimal Production Channel for Private Labels: Too Much or Too Little Innovation?
Author(s) -
Chambolle Claire,
Christin Clémence,
Meunier Guy
Publication year - 2015
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12098
Subject(s) - insourcing , outsourcing , private label , business , production (economics) , national brand , industrial organization , channel (broadcasting) , investment (military) , quality (philosophy) , marketing , commerce , microeconomics , economics , telecommunications , philosophy , epistemology , politics , computer science , political science , law
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 overinvest to increase its buyer power. When outsourcing, a hold‐up effect leads to underinvestment. In addition, selecting the national brand manufacturer may create economies of scale that spur innovation.