IDEAS home Printed from https://ideas.repec.org/p/zwi/fpcrep/044.html
   My bibliography  Save this paper

Assessing the Competitive Interaction Between Private Labels and National Brands

Author

Listed:
  • Ronald W. Cotterill
  • William P. Putsis Jr.
  • Ravi Dhar

Abstract

In contrast to single-equation cross-sectional studies of private label share, developing a complete understanding of the nature of the competitive interaction between national brands and private labels requires an understanding of the determinants of both demand and strategic pricing decisions by firms. Consequently, we estimate a simultaneous system of share and price for private labels and national brands. From the empirical results, two measures of market response are derived. The unilateral demand elasticity measures the pure ?own? demand response, while the residual (or ?total?) elasticity also captures the impact of competitive price reaction (Baker and Bresnahan 1985). When taken together, these provide important strategic insights into the pricing interaction between national brands and private labels. In our empirical analysis, we employ a flexible, non-linear demand specification, the 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. Incorporating LA/AIDS demands into a structural equation framework represents an important departure from previous demand specifications in competitive analysis. Using the proposed LA/AIDS framework, we perform a detailed intra-category analysis using data on six individual categories: bread, milk, pasta, instant coffee, butter and margarine. In addition, in an attempt to generalize the results to a broader set of categories and in order to enable us to compare our results to previous cross-section studies, we also estimate using a sample pooled across 125 categories and 59 geographic markets. Consistent with our objectives, we find 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. Further, estimates of residual demand elasticities suggest that examination of partial demand elasticities alone may provide an incomplete picture of the ability of brands to raise price. Managerial implications, limitations and suggestion for future research are discussed.

Suggested Citation

  • Ronald W. Cotterill & William P. Putsis Jr. & Ravi Dhar, 1999. "Assessing the Competitive Interaction Between Private Labels and National Brands," Food Marketing Policy Center Research Reports 044, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  • Handle: RePEc:zwi:fpcrep:044
    as

    Download full text from publisher

    File URL: http://fmpc.uconn.edu/publications/rr/rr44.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ronald W. Cotterill & Andrew W. Franklin, 1999. "An estimation of consumer benefits from the public campaign to lower cereal prices," Agribusiness, John Wiley & Sons, Ltd., vol. 15(2), pages 273-287.
    2. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-1398, November.
    3. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    4. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
    5. David Besanko & Sachin Gupta & Dipak Jain, 1998. "Logit Demand Estimation Under Competitive Pricing Behavior: An Equilibrium Framework," Management Science, INFORMS, vol. 44(11-Part-1), pages 1533-1547, November.
    6. Connor, John M & Peterson, Everett B, 1992. "Market-Structure Determinants of National Brand-Private Label Price Differences of Manufactured Food Products," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 157-171, June.
    7. S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
    8. Ronald W. Cotterill & William P. Putsis Jr., 1998. "Testing the Theory: Vertical Strategic Interaction and Demand Functional Form," Food Marketing Policy Center Research Reports 040, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    9. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-793, May.
    10. Froeb, L.M. & Werden, G.J., 1991. "Correlation, Causality, and all that Jazz: The Inherent Shortcomings of Price Tests for Antitrust Market Delineation," Papers 91-6, U.S. Department of Justice - Antitrust Division.
    11. Gasmi, F & Laffont, J J & Vuong, Q, 1992. "Econometric Analysis of Collusive Behavior in a Soft-Drink Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 277-311, Summer.
    12. Ronald W. Cotterill, 1999. "High cereal prices and the prospects for relief by expansion of private label and antitrust enforcement," Agribusiness, John Wiley & Sons, Ltd., vol. 15(2), pages 229-245.
    13. Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
    14. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    15. Kadiyali, Vrinda & Vilcassim, Naufel & Chintagunta, Pradeep, 1998. "Product line extensions and competitive market interactions: An empirical analysis," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 339-363, November.
    16. Greg M. Allenby & Peter E. Rossi, 1991. "Quality Perceptions and Asymmetric Switching Between Brands," Marketing Science, INFORMS, vol. 10(3), pages 185-204.
    17. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
    18. Slade, Margaret E, 1995. "Product Rivalry with Multiple Strategic Weapons: An Analysis of Price and Advertising Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 445-476, Fall.
    19. Eunkyu Lee & Richard Staelin, 1997. "Vertical Strategic Interaction: Implications for Channel Pricing Strategy," Marketing Science, INFORMS, pages 185-207.
    20. Gelfand, Matthew D. & Spiller, Pablo T., 1987. "Entry barriers and multiproduct oligopolies: Do they forebear or spoil?," International Journal of Industrial Organization, Elsevier, vol. 5(1), pages 101-113, March.
    21. Carter, Richard A. L. & Nagar, Anirudh L., 1977. "Coefficients of correlation for simultaneous equation systems," Journal of Econometrics, Elsevier, vol. 6(1), pages 39-50, July.
    22. Robert P. Leone, 1995. "Generalizing What Is Known About Temporal Aggregation and Advertising Carryover," Marketing Science, INFORMS, vol. 14(3_supplem), pages 141-150.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    competition; competitive strategy; private labels; pricing; Demand and Price Analysis;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zwi:fpcrep:044. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/dauctus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.