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Assessing The Impact Of Retailer Store Brand Presence On Manufacturer Brands In An Equilibrium Framework

  • MICHAEL A. COHEN
  • RONALD W. COTTERILL

This article assesses the impact of retailer own-labeled products on manufacturer brand prices, profitability, and consumer welfare. Using chain-level retail scanner data from Boston's white fluid milk market the analysis estimates a random coefficients logit demand model employing a mathematical programming equilibrium constraint(MPEC) method. One can compute profit margins implied for a set of pricing games using estimated demand parameters. Nonparametrically identified non-nested tests identify the most likely pricing game for the Boston white fluid milk market. Results from this analysis indicate that branded milk manufacturers are Stackelberg leaders to retailers and store brand milks are procured at or near cost. This baseline model of the market is matched against a series of counterfactual markets to assess the impact of strong store brands. One counterfactual simulation considers the absence of the leading retailer's own labeled milk. Another considers the market without store brand milks. Simulation results indicate that strong store brands increase channel profits, retailer profits, and consumer welfare, while having mixed effects on equilibrium manufacturer brand retailer prices. In addition results testify that with no store brand milk consumer welfare is approximately 11.5% lower.

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File URL: http://hdl.handle.net/10.1111/j.1467-6451.2011.00460.x
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Article provided by Wiley Blackwell in its journal The Journal of Industrial Economics.

Volume (Year): 59 (2011)
Issue (Month): 3 (09)
Pages: 372-395

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Handle: RePEc:bla:jindec:v:59:y:2011:i:3:p:372-395
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  1. Bonnet, Céline & Dubois, Pierre, 2008. "Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Non Linear Pricing and Resale Price Maintenance," IDEI Working Papers 519, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2008.
  2. Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 447-470.
  3. Aviv Nevo, 1998. "Measuring Market Power in the Ready-to-Eat Cereal Industry," NBER Working Papers 6387, National Bureau of Economic Research, Inc.
  4. Villas-Boas, Sofia B., 2006. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0z26d2v9, Department of Agricultural & Resource Economics, UC Berkeley.
  5. Smith, Richard J, 1992. "Non-nested.Tests for Competing Models Estimated by Generalized Method of Moments," Econometrica, Econometric Society, vol. 60(4), pages 973-80, July.
  6. Jagmohan S. Raju & Raj Sethuraman & Sanjay K. Dhar, 1995. "The Introduction and Performance of Store Brands," Management Science, INFORMS, vol. 41(6), pages 957-978, June.
  7. Mills, David E, 1995. "Why Retailers Sell Private Labels," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 509-28, Fall.
  8. Corts, Kenneth S., 1998. "Conduct parameters and the measurement of market power," Journal of Econometrics, Elsevier, vol. 88(2), pages 227-250, November.
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