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Market Share and Price Setting Behavior For Private Labels and National Brands

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  • Ronald W. Cotterill
  • William P. Putsis Jr.
  • Ravi Dhar
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    Abstract

    In this paper, we develop a framework for estimating market share and price reaction equations in an attempt to understand the nature of competitive interaction in the market for private label and branded grocery products. Specifically, we employ a 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. This enables us to consistently estimate shareprice relationships, accounting for demand-side and competitive reactions simultaneously. The incorporation of LA/AIDS demands into a structural equation framework represents an important departure from previous demand specifications in competitive analysis. In addition to its rigorous foundation in utility theory, LA/AIDS demands are especially flexible for demand-side estimation, provide consistent reaction functions on the supply side, and have particularly nice aggregation properties. In order to test the relative contribution of employing a flexible LA/AIDS functional form on the demand-side, and in a preliminary attempt to assess manufacturer-retailer interaction on the supply side, we compare our general framework (LA/AIDS demands with retailers following a proportional markup rule) to two alternative models of manufacturer-retailer interaction: Choi?s (1991) Manufacturer-Stackelberg (M-S) model under linear demands, as well as Shubik demands under Stackelberg conduct (Raju, Sethuraman and Dhar 1995a, 1995b). We first apply the proposed LA/AIDS framework to a sample pooled across 125 categories and 54 geographic markets in an attempt to produce result that generalize across the entire sample. We then estimate all three models using data on seven individual categories: bread, milk, pasta, yogurt, instant coffee, butter and margarine. We conclude that the LA/AIDS demand specification is preferred to the alternative linear demand specifications. Further, the empirical findings support our premise 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. Most importantly, our specification with LA/AIDS demands produced excellent overall fits, as well as reasonable demand and price response elasticities.

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    Bibliographic Info

    Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 051.

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    Date of creation: 2000
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    Handle: RePEc:zwi:fpcrep:051

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    Postal: 1376 Storrs Road, U-21, Storrs, Connecticut 06269-4021
    Phone: 860-486-2836
    Fax: 860-486-1932
    Web page: http://www.zwickcenter.uconn.edu
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    Related research

    Keywords: competition; competitive strategy; private labels; pricing; Demand and Price Analysis; Industrial Organization;

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    Cited by:
    1. Gomez, Miguel I. & Rao, Vithala R. & Yuan, Hong, 2008. "Effects of Horizontal and Vertical Market Power on Trade Promotion Budget and Allocation in the US Supermarket Industry: An Experimental and Empirical Analysis," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6247, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Rebecca L. O. Cleary & Rigoberto A. Lopez, 2007. "Is Wal-Mart Good for Competition? Evidence from Milk Prices," Food Marketing Policy Center Research Reports 101, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    3. Dawes, John & Nenycz-Thiel, Magda, 2013. "Analyzing the intensity of private label competition across retailers," Journal of Business Research, Elsevier, vol. 66(1), pages 60-66.
    4. Kuo, Chia-Wei & Yang, Shu-Jung Sunny, 2013. "The role of store brand positioning for appropriating supply chain profit under shelf space allocation," European Journal of Operational Research, Elsevier, vol. 231(1), pages 88-97.
    5. Goldfarb, Avi & Lu, Qiang & Moorthy, Sridhar, 2007. "Measuring Brand Value in an Equilibrium Framework," Research Reports 149205, University of Connecticut, Food Marketing Policy Center.
    6. Song Zan Chiou-Wei, 2004. "The determinants of direct mail coupon usage revisited: Evidence from count panel data models," Agribusiness, John Wiley & Sons, Ltd., vol. 20(2), pages 189-200.
    7. Tian, Li, 2006. "The Strategic Effect of Private Label in a Vertical Bargaining Model," Research Reports 170112, University of Connecticut, Food Marketing Policy Center.
    8. Marie-Laure Allain & Claire Chambolle & Stéphane Turolla & Sofia Villas-Boas, 2013. "The impact of retail mergers on food prices: evidence from France," Working Papers 181943, Institut National de la Recherche Agronomique, France.
    9. Rodrigo Menon Simões Moita & Daniel Silv, 2014. "Follow The Leader: Competition In The Auto Financing Sector," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 136, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    10. Sandra Horvat, 2013. "Application of product life cycle concept to private label management," Tržište/Market, Faculty of Economics and Business, University of Zagreb, vol. 25(1), pages 63-75.

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