Demand Screening in Launching a New Private Label Product

This paper considers a screening mechanism which deals with information asymmetry of demand in launching a new private label product through a distribution channel where the retailer has private information on demand. An uninformed manufacturer proposes a lump sum payment contract, which a retailer either accepts or rejects. Rejection yields zero profits for both retailer and manufacturer. If the retailer accepts, the manufacturer sets a wholesale price to maximize her expected profit, and the retailer responses with an optimal retail price. Particularly when the parameters satisfy certain conditions, there exists a unique separating equilibrium, which both firms make their optimal decisions. The uninformed manufacturer can use a lump sum transfer payment T as an instrument to screen the informed retailer´s type on demand. It is shown whether the uninformed player can screen the informed player´s type or not by designing a transfer payment contract, it ties in the player´s market power within the distribution channel