Information transmission in launching a new private label product

Abstract

With the buyer’s market strengthening, retailers have begun to lead in product development by introducing their own private label products. The success of such a new product launch relies on transmission of demand information along a supply chain, yet this new phenomenon has been little researched. This paper attempts to address such an issue by modeling vertical information transmission in a supply chain consisting of a retailer and a manufacturer. The retailer would like to introduce a new private label product and knows the demand of the product to be either high or low, while the manufacturer only knows the prior distribution of the demand type. This study attempts to find whether a wholesale-price contract or a two-part tariff contract can facilitate the manufacturer to identify the demand type. The results show that the two-part tariff contract is always effective in realizing information transmission as long as the retailer’s reserve profit remains within a reasonable range.

Keywords

Information transmission / private label product / contract

References

[1] Ailawadi K.L., Harlam B.. An empirical analysis of the determinants of retail margins: the role of store-brand share. Journal of Marketing, 2004, 68(1): 147-165.

[2] Cachon G.P., Lairiviere M.A.. Contracting to assure supply: How to share demand forecasts in a supply chain. Management Science, 2001, 47(5): 629-646.

[3] Chu W.. Demand signaling and screening in channels of distribution. Marketing Science, 1992, 11(4): 327-347.

[4] Chu W., Chu W.. Signaling quality by selling through a reputable retailer: an example of renting the reputation of another agent. Marketing Science, 1994, 13(2): 177-189.

[5] Chu, W. & Messinger, P.R. (1993). Product proliferation, slotting allowances, and information: sources of retailer clout. Working Paper, Washington University

[6] Corstjens M., Lal R.. Building store loyalty through store brands. Journal of Marketing Research, 2000, 37(3): 281-291.

[7] Davis, S. (1990). Signaling product quality to and through a retailer. Working Paper, Washington University

[8] Desai P.S.. Multiple messages to retain retailers: signaling new product demand. Marketing Science, 2000, 19(4): 381-389.

[9] Dunne D., Narasimhan C.. The new appeal of private labels. Harvard Business Review, 1999, 77(3): 41-52.

[10] Kirmani A., Rao A.R.. No pain, no gain: a critical review of the literature on signaling unobservable product quality. Journal of Marketing, 2000, 64(2): 66-79.

[11] Lariviere M.A., Padmanabhan V.. Slotting allowances and new product introductions. Marketing Science, 1997, 16(2): 112-128.

[12] Lee E., Staelin R.. Vertical strategic interaction: Implications for channel pricing strategy. Marketing Science, 1997, 16(3): 185-207.

[13] Messinger P.R., Narasimhan C.. Has power shifted in the grocery channel?. Marketing Science, 1995, 14(2): 189-223.

[14] Rao A.R., Mahi H.. The price of launching a new product: empirical evidence on factors affecting the relative magnitude of slotting allowances. Marketing Science, 2003, 22(2): 246-245.

[15] Tan, G.W. & Wang, B. (2001). The relationship between product nature, demand patterns and information sharing strategies. In: 22nd ICIS: 543–549, New Orleans, USA, 16–19, December 2001

[16] Wilson S.. Bucklin R.E., Schmalensee D.H.. How will new information systems change the distribution process?. Viewpoints on the changing consumer goods distribution scene, 1987, Cambridge, MA: Marketing Science Institute 16-18.

[17] Wolfsenberger, B. (1991). The price of admission. New England Business, (December1): 11–14