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How do advertised brands benefit from private labels? An application of rational expectations models

Private labels have traditionally been viewed as a threat to advertised brands. Contrary to traditional wisdom, this study uses a two-asset rational expectations model to show that advertised brands could benefit from private labels. While the manufacturer’s advertising creates product differentiation, the retailer’s synchronous pricing strategy further enhances the product differentiation and raises profits as well as the efficiency of price discounts for the advertised brand. In addition, the existence of private labels improves the advertising efficiency, especially for newly introduced brands. The economic role of private labels is not limited to taking a free ride on the manufacturer’s advertising efforts, and this role cannot be replaced by another advertised brand.