A Transaction Cost Rationale for Private Branding and Its Implications for the Choice of Domestic vs Offshore Outsourcing

In this study, I take a transaction cost approach to explore the coincidence of private branding with offshore outsourcing - two retail trends that have attracted substantial attention but have never been analyzed concurrently. Retailers now play an increased role in marketing a product to shoppers, although their marketing efforts are usually specific to the supplier who brands the product. This is called brand specificity, a special case of asset specificity that drives up the cost of conducting the manufacturer-retailer transaction, especially when the parties are located in different nations. With the right to brand a product being shifted from manufacturers to retailers, private branding can eliminate this problem of brand specificity that inflicts a transaction cost penalty on offshore outsourcing, which is why the two seemingly unrelated retail trends coexist. Data obtained from a national chain reveal that the retailer is more likely to brand a product that needs its marketing efforts, but less motivated to outsource the product offshore before putting a private brand on it. These results establish a transaction cost link between private branding and offshore outsourcing, from which important theoretical and practical implications can be drawn.