Do private labels increase retailer bargaining power (original) (raw)
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The Strategic Role of Private Labels on Retail Competition
We investigate the strategic role of private labels in limiting retail competition. Private labels are unique differentiators for retailers. By launching and credibly committing to a strong private label program, a strong retailer can limit the market potential for competing retailers. Consequently, weaker retailers may not be able to meet threshold profits and exit the market. We derive the private label shares needed to induce exit. A model implication is that the private label share required to induce exit increases with increasing national brand margins. We also conduct an empirical analysis and find evidence supporting the propositions. Combining Dominick's store level data with Zip Code Business Patterns data, we find that at the zip code level, the private label share affects the number of stores competing in the market.
Retailer-manufacturer Competition, the Role of Private Labels, and the Weather Effect∗
Private labels are known to provide retailers with higher retail margins and bargaining power over the manufacturers of national brands. Do these advantages change if the external environment, such as weather, changes? This study examines how a change in temperature influences the competition between a retailer and the upstream manufacturers of national brands. Our study focuses on the strategic role of private labels in the vertical interaction between the two players. By estimating a structural model accounting for both the demand and supply-side decisions, we find that with a rise in temperature, the retailer earns both share and margin advantages, compared to the upstream manufacturers. As temperature increases, the increase in consumer demand for private labels is more significant than national brands. This may give the retailer a bargaining advantage for a better contract from the manufacturers of national brands. Our results show that private labels and national brands of dif...
2019
In this paper, we study the competition between national brands and private labels (or store brands) by analyzing the impacts of their presence on strategies, sales, and profits in a vertical channel structure. We use a differential game, where the channel members control price and non–price marketing variables, and investigate two scenarios. The first is used as a benchmark. It considers an exclusive retailer that distributes only a national brand provided by a manufacturer, who invests in national advertising to build its brand’s goodwill. In the second scenario, the retailer owns a private label that competes with the national brand. By computing the results under both scenarios, we provide answers to the following research questions: (i) What should the price and the non–price marketing strategies be, with and without the private label? (ii) How do they compare? (iii) Is the presence of a private label always profitable for the retailer and harmful to the manufacturer, as the li...
Analyzing the intensity of private label competition across retailers
Journal of Business Research
Examining how buyers of one private label (PL) in a product category also cross-purchase the private labels of competing retailers in the same category is the focus of this study. Understanding consumer cross-purchasing of PLs is important to retailers, who use PLs as one tactic to differentiate from other retailers; and important to manufacturers, who compete against PLs. A higher level of PL cross-purchasing indicates heightened competitive intensity among the PLs of rival retailers. Results across 27 categories indicate that PLs compete against national brands (NBs) within-store, but also compete against the PLs of other retailers across stores. Heightened competition among the PLs of different retailers occurs in categories with higher purchase frequency; in which the average PL price is well below the average NB price; and in categories with higher levels of manufacturer brand price promotions.
Assessing the Competitive Interaction between Private Labels and National Brands
The Journal of Business, 2000
In contrast to single-equation cross-sectional studies of private label share, developing a complete understanding of the nature of the competitive interaction between national brands and private labels requires an understanding of the determinants of both demand and strategic pricing decisions by firms. Consequently, we estimate a simultaneous system of share and price for private labels and national brands. From the empirical results, two measures of market response are derived. The unilateral demand elasticity measures the pure "own" demand response, while the residual (or "total") elasticity also captures the impact of competitive price reaction (Baker and Bresnahan 1985). When taken together, these provide important strategic insights into the pricing interaction between national brands and private labels. In our empirical analysis, we employ a flexible, non-linear demand specification, the Linear Approximate Almost Ideal Demand System (LA/AIDS, Deaton and Muellbauer 1980a), and specify the price reaction equations derived under the LA/AIDS demand specification. Incorporating LA/AIDS demands into a structural equation framework represents an important departure from previous demand specifications in competitive analysis. Using the proposed LA/AIDS framework, we perform a detailed intra-category analysis using data on six individual categories: bread, milk, pasta, instant coffee, butter and margarine. In addition, in an attempt to generalize the results to a broader set of categories and in order to enable us to compare our results to previous cross-section studies, we also estimate using a sample pooled across 125 categories and 59 geographic markets. Consistent with our objectives, we find that consumer response to price and promotion decisions (demand) and the factors influencing firm pricing behavior (supply) jointly determine observed market prices and market shares. Further, estimates of residual demand elasticities suggest that examination of partial demand elasticities alone may provide an incomplete picture of the ability of brands to raise price. Managerial implications, limitations and suggestion for future research are discussed.
Private Labeling and Competition between Retailers
Journal of Agricultural & Food Industrial Organization, 2000
This paper studies the effect of private labeling on retailer competition-an issue neglected in literature until now. Once implemented, private labeling may well be less favorable to society than previously thought because it can encourage consolidation of the retail industry. Either with linear pricing (when goods are not loose substitutes) or with wholesale price discrimination (when goods are not loose substitutes), the vertical channel is inclined to promote a retail monopoly while consumers prefer some retail competition. This conflict of interest would not arise in the absence of private labeling.
An Empirical Investigation of Private Label Supply by National Label Producers
Marketing Science, 2010
Private labels (PLs) are ubiquitous in several categories, including groceries, apparel, and appliances. However, existing empirical work has not examined the differential impact of various upstream supply arrangements for PL products or the strategic motives for PL supply. To do so requires one to model the interaction between private and national label (NL) products both upstream and downstream while accounting for strategic behavior on the part of manufacturers and retailers and retaining essential differences between NL and PL products. We build a model that satisfies these requirements and lets us answer our two research questions: First, can an NL firm profit from being an outsourced PL supplier? Second, what are the upstream and downstream impacts of different PL supply arrangements? We answer these questions by modeling private labels as homogenous products at wholesale, but as differentiated products at retail. In contrast, national label products are differentiated at both...
Journal of Retailing, 2014
Premium private labels (PLs) are considered one of the hottest trends in grocery retailing. Still, retailers do not feel the need to introduce premium PLs in every category. Generalizing across approximately 150 categories for six retailers from two countries that already carry premium PLs for several years, the authors find that retailers are more likely to introduce premium PLs in categories with a higher industry PL share, and with a more proliferated assortment in terms of standard PLs. However, retailers are also aware of the risk of creating PL fatigue at high levels of standard PL proliferation. Further, premium PLs are more likely to be introduced in categories with more frequent price promotions, a longer interpurchase time, a higher need for variety, and higher functional, but lower social, risk. In addition, retailers consider category growth and the prevailing practice of their country's premium-PL pioneer when deciding in which categories to also introduce a premium PL. Finally, when NBs spend a smaller amount on advertising and NB proliferation is moderate, premium PL introductions are more likely. Importantly, while some of the earlier empirical generalizations on factors conducive to a standard PL entry still hold for a premium PL entry, new variables need to be considered as well, while other insights need to be updated to better reflect the new reality of higher-quality/higher-price premium PL introductions.