How Do National Brands And Store Brands Compete?

This paper considers the nature of competition between national brands and store brands (otherwise known as private label or own label goods). We expound an analytical framework that allows for both price and non-price (quality) competition and use this to see how these different forms of rivalry interact in a setting where a leading retailer offering a store brand acts as both a customer and competitor to a national brand producer. This relationship thus entails both vertical and horizontal competition. We show that generally the retailer will seek to position its store brand as closely as possible to the national brand, by seeking to minimise the quality gap, but price the two goods very differently, with a wide price gap, as a means to segment consumers. Store brand introduction can lead to overall higher prices, so be against consumers’ interest, unless there is intense head-to-head rivalry for value-conscious consumers. Intense rivalry is more likely to happen if the national brand producer can exercise some control over its own product’s retail price (e.g. by being allowed to use maximum resale price maintenance) and has protection against copycat (lookalike) store brands ensuring a degree of differentiation between the competing products. Accordingly, we suggest that there are horizontal competition benefits on top of the usual vertical (alleviating double marginalisation) and intellectual property (to encourage brand investments) reasons to support respectively a more lenient policy stance towards RPM and a tougher stance against parasitic copycatting. The mix of horizontal and vertical aspects has important implications for undertaking market definition analysis in CPG markets, and specifically testing whether store brands and national brands are in the same product market. We highlight the considerable care needed in applying and interpreting the usual price and demand elasticity analysis used in market definition tests because of how segmentation and item-by-item retail pricing can distort demand and sales patterns.