Advanced Search
MyIDEAS: Login

What Can the Price Gap between Branded and Private Label Products Tell Us about Markups?

Contents:

Author Info

  • Robert Barsky

    (University of Michigan and NBER)

  • Mark Bergen

    (University of Minnesota)

  • Shantanu Dutta

    (University of Southern California)

  • Daniel Levy

    ()
    (Emory University, Bar Ilan University)

Abstract

In this paper we investigate the size of markups for nationally branded products sold in the U.S. retail grocery industry. Using scanner data from a large Midwestern supermarket chain, we compute several measures of upper and lower bounds on markup ratios for over 230 nationally branded products in 19 categories. Our method is based on the insight that retail and wholesale prices of private label products provide information on marginal costs that are also applicable to the appropriately matched nationally branded products. Under reasonable assumptions - the accuracy of which we consider in some detail – the wholesale price of a private label product is an upper bound for the marginal manufacturing cost of its nationally branded equivalent, while the retailer’s margin on the national brand is an upper bound on the retailer’s marginal handling cost for both the brand and private label versions. We find that lower bounds on the “full” markup ratio range from 3.44 for toothbrushes and 2.23 for soft drinks to about 1.15-1.20 for canned tuna and frozen entrees, with the majority of categories falling in the range 1.40-2.10. Lower bounds on manufacturers’ markups are even higher. Thus the data indicate that markups on nationally branded products sold in U.S. supermarkets are large.In this paper we investigate the size of markups for nationally branded products sold in the U.S. retail grocery industry. Using scanner data from a large Midwestern grocery chain we compute upper and lower bounds for the “true” markup ratio for over 230 nationally branded products in 19 categories. Our method is based on the insight that retail and wholesale prices of private label products provide information on marginal costs of nationally branded products as well. The data include not only the prices and quantities sold by UPC, but also the retailers’ margins on each product, which allow us to measure the markup ratios for nationally branded product manufacturers using both wholesale and retail prices. We find that lower bounds on markup ratios measured this way range from 3.44 for toothbrushes and 2.23 for soft drinks to about 1.15–1.20 for canned tuna and frozen entrees, with the majority of categories falling in the range 1.4–2.10. Thus the data indicate that markups on nationally branded products sold in U.S. supermarkets are large.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.biu.ac.il/soc/ec/wp/2-02/2-02.html
File Function: Working paper
Download Restriction: no

Bibliographic Info

Paper provided by Department of Economics, Bar-Ilan University in its series Working Papers with number 2002-02.

as in new window
Length:
Date of creation: Mar 2002
Date of revision:
Handle: RePEc:biu:wpaper:2002-02

Contact details of provider:
Postal: Faculty of Social Sciences, Bar Ilan University 52900 Ramat-Gan
Phone: Phone: +972-3-5318345
Fax: +972-3-7384034
Email:
Web page: http://econ.biu.ac.il
More information through EDIRC

Related research

Keywords: markup; retail and wholesale price; marginal cost; national brand; private label;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Basu, S. & Fernald, J.G., 1993. "Are Apparent Productive Spillovers a Figment of Specification Error," Papers 93-22, Michigan - Center for Research on Economic & Social Theory.
  2. Dutta, Shantanu & Bergen, Mark & Levy, Daniel, 2002. "Price flexibility in channels of distribution: Evidence from scanner data," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1845-1900, September.
  3. Levy, Daniel & Dutta, Shantanu & Bergen, Mark, 2002. "Heterogeneity in Price Rigidity: Evidence from a Case Study Using Microlevel Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 197-220, February.
  4. Daniel Levy & Shantanu Dutta & Mark Bergen & Robert Venable, 1998. "Price adjustment at multiproduct retailers," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 81-120.
  5. Nevo, Aviv, 1999. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Competition Policy Center, Working Paper Series qt7cm5p858, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  6. Yuxin Chen & James D. Hess & Ronald T. Wilcox & Z. John Zhang, 1999. "Accounting Profits Versus Marketing Profits: A Relevant Metric for Category Management," Marketing Science, INFORMS, vol. 18(3), pages 208-229.
  7. Rajiv Lal & Chakravarthi Narasimhan, 1996. "The Inverse Relationship Between Manufacturer and Retailer Margins: A Theory," Marketing Science, INFORMS, vol. 15(2), pages 132-151.
  8. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1.
  9. Julio J. Rotemberg & Garth Saloner, 1984. "A Supergame-Theoretic Model of Business Cycles and Price Wars During Booms," Working papers 349, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Judith A. Chevalier & Anil K. Kashyap & Peter E. Rossi, 2000. "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data," NBER Working Papers 7981, National Bureau of Economic Research, Inc.
  11. Robert E. Hall, 1988. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  12. Slade, Margaret E, 1998. "Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 87-107, January.
  13. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October.
  14. Brown, C. & Medoff, J.L., 1991. "Cheaper By The Dozen," Harvard Institute of Economic Research Working Papers 1557, Harvard - Institute of Economic Research.
  15. Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc.
  16. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 285-338.
  17. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:biu:wpaper:2002-02. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Department of Economics).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.