Price Di erentials among Brands in Retail Distribution: Product Quality and Service Quality

A theoretical model is proposed to disentangle the contribution of brand qualityand retailer service quality in explaining brand price differentials across retailers. Two testablehypotheses emerge: i) for each brand type, price differences across retailers are independentof brand quality differentials, and ii) at a given retailer, price differences between different brand qualities are independent of service quality differentials. Our empirical analysis, for asample of UK grocery retailer prices, discloses that retailers that offer higher service qualitysell same quality brands at higher prices. In particular, service quality premia amount to 6%for national brands and are in the range of 9-15% for low-quality store brands. Besides, at agiven retailer, the price premia paid for the national brand are very large: around 150% betweennational brands and low-quality store brands, and around 40% between national brands and high-quality store brands. Also, the price differential between the national brand and thelow-quality store brand does not increase with service quality.