Product design and decision rights in vertical structures

The paper argues that the emergence of private labels can be partially explained by the new information technologies available at the retail level. In our approach, the owner of a brand has “decision rights” on product design, while the details of the production and distribution are left to contractual negotiation. Manufacturers have privileged information about the cost of improving quality, while distributors have private information on the impact of quality on demand. We show that ownership of the brand should be allocated to the party with a relative informational advantage. In particular, if the information of the distributor improves due to a technological shock on data collection and information management, it may become optimal for the distributor to introduce its own brand, rather than to distribute a manufacturer׳s brand.