| Summary: | Private labels - products controlled by retailers instead of suppliers - are an increasingly important market segment for firms worldwide. They, and the closely related concept of buyer power, have become a topic of major interest and concern for competition authorities around the world. Firstly we explain the growth of private labels as retailers taking over the role of quality certification from suppliers. Consumers, wary about product quality, seek reassurance in a brand they can trust, and this role of certifying quality is moving downstream from manufacturers to distributors. We explain this by modelling the negotiations that takes place within the production chain, and demonstrate that by establishing a private label a retailer improves his sourcing options and hence his bargaining position, and increases his profits. Next we examine how the presence of private labels in a market affects non-price competition between firms, in particular incentives to invest, an area which the literature has neglected in favour of a simple focus on prices. We demonstrate that, while under certain conditions the conventional wisdom the private labels can reduce suppliers' investment incentives can be correct, the outcome is more complex than traditionally thought. Private labels can also potentially spur suppliers to increase investment, which ultimately benefits consumers. Thirdly we examine the implications of private labels for an argument of great significance in competition policy: the countervailing buyer power merger defence. We discuss several major cases where this idea - that buyer power downstream can prevent wholesale prices rising following an upstream merger - has been crucial in determining the outcome. We present a formal model of this argument - to our knowledge the first and demonstrate some limitations to the validity of this defence, but also highlight circumstances where it may be unexpectedly applicable.
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