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Price differentials among brands in retail distribution: product quality and service quality

  • MANEZ, Juan A.

    (Department of Applied Economics II and ERI-CES, University of Valencia, Spain)

  • MONER-COLONQUES, Rafael

    (Department of Economic Analysis and ERI-CES, University of Valencia, Spain)

  • SEMPERE-MONERRIS, José J.

    ()

    (Department of Economic Analysis and ERI-CES, University of Valencia, Spain and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

  • URBANO, Amparo

    (Department of Economic Analysis and ERI-CES, University of Valencia, Spain)

We develop a theoretical model of retail competition that include two sources of quality, one inherently linked to brand characteristics and the other linked to the retailer level of service. We then measure their contribution in explaining the observed price differentials for a sample of U.K. grocery retailer prices in the south of Coventry during the period November 1995 to March 1997. We find that retailers that offer a higher quality service sell same quality brands at higher prices. These price premia are explained solely by differences in service quality levels. We find econometric evidence that they amount to 6 percent for national brands and to a range between 9 percent and 15 percent for low-quality store brands. Besides, at a given store, the price premia paid for the national brand is positive. These differentials are very large: around 150 percent between national brands and low-quality store brands, around 40 percent between national brands and high-quality store brands. Also, the price differential between the national brand and the low-quality store brand does not increase with its service quality. Besides, the price of the high-quality store brand approaches the price of the national brand when service quality increases. Thus suggesting that stores that offer high quality service uses the level of service as a strategic tool to target the leading national brand consumers.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2011017.

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Date of creation: 01 Mar 2011
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Handle: RePEc:cor:louvco:2011017
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  1. Walsh, Patrick Paul & Whelan, Ciara, 1999. "Loss leading and price intervention in multiproduct retailing: welfare outcomes in a second-best world1," International Review of Law and Economics, Elsevier, vol. 19(3), pages 333-347, September.
  2. Staahl Gabrielsen, T. & Sorgard, L., 2000. "Private Labels, Price Rivalry, and Public Policy," Papers 8/00, Norwegian School of Economics and Business Administration-.
  3. Perry, Martin K. & Porter, Robert H., 1990. "Can resale price maintenance and franchise fees correct sub-optimal levels of retail service?," International Journal of Industrial Organization, Elsevier, vol. 8(1), pages 115-141.
  4. James Brander & Jonathan Eaton, 1982. "Product Line Rivalry," Working Papers 519, Queen's University, Department of Economics.
  5. MONER_COLONQUES, Rafael & SEMPERE-MONERRIS, José J. & URBANo, Amparo, . "Product line choice in retail duopoly," CORE Discussion Papers RP -2428, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  7. repec:cup:cbooks:9780521681599 is not listed on IDEAS
  8. Wiggins, Steven N & Raboy, David G, 1996. "Price Premia to Name Brands: An Empirical Analysis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 377-88, December.
  9. Duranton, Gilles & Martin, Philippe & Mayer, Thierry & Mayneris, Florian, 2010. "The Economics of Clusters: Lessons from the French Experience," OUP Catalogue, Oxford University Press, number 9780199592203, March.
  10. Martinez-Giralt, Xavier & Neven, Damien J, 1988. "Can Price Competition Dominate Market Segmentation?," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 431-42, June.
  11. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
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