TV advertising spillovers and demand for private labels: the case of carbonated soft drinks

The expansion of private labels, or store brands, has transformed consumer choice sets and competition in retail markets, prompting manufacturers to fight back with renewed pricing and product and promotion strategies to forestall further private label expansion. This article examines the spillover effects of television advertising on brand-level consumer demand for carbonated soft drinks (CSDs), including private labels, using a random coefficients logit model with household purchasing and advertising viewing Nielsen data. As in previous work, we find that although brand spillover effects significantly increase demand for CSD brands in the same company and undermine demand facing other manufacturers’ CSD brands, surprisingly, there are positive spillover effects on the demand for private label brands. This indicates that brand advertising is persuasive with respect to manufacturers’ brands but complementary with respect to private labels. Further results show that eliminating television advertising for CSDs would lower aggregate CSD sales as consumers migrate to other beverages, although private labels stand to gain, particularly Wal-Mart brands.     

ARE CONSUMERS MORE LOYAL TO NATIONAL BRANDS THAN TO PRIVATE LABELS?

The evolution of private labels (PLs) can be understood in terms of a strategy adopted by the retail industry with the aim of competing with national brands (NBs). In the 1990s, this strategy led to the development of ‘me too’ products, which currently represent the largest share of store brand products. Since the early 2000s, retailers have widened the range of their store brands by introducing high‐quality products. The aim of this study was to estimate consumers’ attachment to ‘me‐too’ and niche PLs respectively, as compared to NBs. We captured the degree of maturity of these PLs through their price‐elasticities, computed for three staple goods offered by three mass retail companies. It was found that price sensitivity does not differ much between the ‘me‐too’ PLs and the corresponding NBs. This result confirms that ‘me‐too’ products are now considered reliable quality brands. However, in the high quality segment, consumers remain more sensitive to the price of PLs than to that of NBs, a characteristic which may relate to their recent introduction on the market.     

Discount Chains and Brand Policy

Retail chains are observed in many industries. The question addressed here is whether retail chains can exploit buyer power by excluding some brands. In a theoretical model with two differentiated producers and a single retailer, we show that a retailer will require exclusivity (exclude a brand) if the brands are sufficiently symmetric in demand potential. Exclusivity will increase welfare if the excluded brand is a close substitute for the brand carried by the retailer. Our theoretical results are also set in relation to some findings from the Norwegian grocery industry.
JEL Classification : L 12; L 42     

Determinants of price elasticities for private labels and national brands of cheese

An Almost Ideal Demand System model is developed and used to estimate price elasticities for US cheese sold at retail. Growing consumption of cheese coupled with fierce competition between private labels and national brands serves as motivating factors for this study. Per capita consumption of cheese grew by 75% during 1980–2004 and private labels captured a rising share of this growth. Private labels today account for 35% of market share; national brands, for the remaining 65%. Kraft accounts for 45% of national brands, but price increases for Kraft brands led to a sizeable price gap between its brands and private labels. This gap helped to stimulate growth of private labels. Marketing managers seek to capitalize on both growing cheese sales and price gaps for brands. Relevant information for marketing managers is consumer sensitivity to price changes. This study uses 69 weeks of scanner data, with consumers segmented by income levels to derive price elasticities for both lower-and higher-income consumers. Results show lower-income consumers to be more price sensitive. If large price gaps are maintained, the results suggest continued growth of private labels. Yet, meta-analyses for this study suggest that Kraft could lower the price gap and regain market share.     

Brand price differentials in retail distribution: product quality and service quality

A theoretical model is proposed to disentangle the contribution of brand quality and retailer service quality in explaining brand price differentials across retailers. Two testable hypotheses emerge: (i) for each brand type, price differences across retailers are independent of 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 a sample of the U.K. grocery retailer prices, discloses that retailers that offer higher service quality sell 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 a given retailer, the price premia paid for the national brand are very large: around 150% between national 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 the low-quality store brand does not increase with service quality.     

A tale of two Italian cities: brand-level milk demand and price competition

We apply the BLP random coefficient logit model demand model to fluid milk sales data from two north-south Italian cities: Turin and Naples. By virtue of their location and socioeconomic differences, these cities provide a natural experiment for contrasting consumer choices and retail market power related to milk physical and marketing characteristics. Results reveal that, regardless of location, consumers negatively value price increases, fat content and ultra-high temperature (UHT) treatment. However, location matters with respect to brand and type of milk purchased. While in Turin (the higher-income region) demand for the leading manufacturers’ brands is the most price inelastic, in Naples consumers have the lowest price elasticities in case of cheaper milk, often small manufacturer or private label brands. Unlike previous studies, we do not find price elasticities for private labels to be consistently lower (or markups to be higher) compared to manufacturer brands, indicating that private labels have reached maturity in these markets. Further, while demand for fresh milk is more price inelastic in Turin, it is more inelastic for UHT milk in Naples. Likewise, markups and Lerner indexes are higher for fresh milk in Turin and for UHT in Naples corresponding to the more inelastic demands under Bertrand price competition.     

How do advertised brands benefit from private labels? An application of rational expectations models

Private labels have traditionally been viewed as a threat to advertised brands. Contrary to traditional wisdom, this study uses a two-asset rational expectations model to show that advertised brands could benefit from private labels. While the manufacturer’s advertising creates product differentiation, the retailer’s synchronous pricing strategy further enhances the product differentiation and raises profits as well as the efficiency of price discounts for the advertised brand. In addition, the existence of private labels improves the advertising efficiency, especially for newly introduced brands. The economic role of private labels is not limited to taking a free ride on the manufacturer’s advertising efforts, and this role cannot be replaced by another advertised brand.     

Energy price shocks and milk price adjustments

Much previous research on energy price transmission sheds light on the relationship between oil prices and aggregate commodity prices, such as for agricultural products, or food price indexes. This letter uses data from 12 U.S. cities between 2001 and 2011 to examine how energy prices are transmitted to fluid milk products at the retail level. Results indicate the existence of an asymmetric energy pass-through (a rise is transmitted faster than a fall in prices) and that private label milk products are more insulated from energy price shocks and adjust at similar rate with national manufacturer brands.     

ENDOGENOUS TIMING IN A MIXED DUOPOLY: WEIGHTED WELFARE AND PRICE COMPETITION*

In this paper we analyse the endogenous order of moves in a mixed duopoly for differentiated goods. Firms choose whether to set prices sequentially or simultaneously. The private firm maximises profits while the public firm maximises the weighted sum of the consumer and producer surpluses (weighted welfare). It is shown that the result obtained in equilibrium depends crucially on the weight given to the consumer surplus in weighted welfare and on the degree to which goods are substitutes or complements. We also analyse whether the equilibria obtained maximise the sum of the consumer and producer surpluses or not. Finally we study whether the nationality of the private firm influences the results.     

Mergers, brand competition, and the price of a pint

Mergers in the UK brewing industry have reduced the number of national brewers from six to four. The number of brands, in contrast, has remained relatively constant. We analyze the effects of mergers on brand competition and pricing. Brand-level demand equations are estimated from a panel of draft beers. To model brand-substitution possibilities, we estimate the matrix of cross-price elasticities semiparametrically. Our structural model is used to assess the strength of brand competition along various dimensions and to evaluate the mergers. In particular, we compute equilibria of pricing games with different numbers of players.     

Consumer poaching,brand switching,and price transparency

This paper addresses price transparency on the consumer side in markets with behavioral price discrimination which feature welfare reducing brand switching. When long-term contracts are not available, an increase in transparency intensifies competition, lowers prices and profits, reduces brand switching and benefits consumers and welfare. With long-term contracts, an increase in transparency reduces the use of long-term contracts, leading to more brand switching and a welfare loss. Otherwise, the results are the same as without long-term contracts.     

The costs and benefits of refuge requirements: The case of Bt cotton

Refuge requirements have been the primary regulatory tool to delay pest resistance to Bt crops. This paper presents a simple method to estimate the annual cost of refuges to producers, applying it to Bt cotton. It also examines broader welfare impacts, estimating how Bt cotton acreage restrictions affect producer surplus, consumer surplus, seed supplier profits, and commodity program outlays. The implications of grower adoption behavior — partial adoption, aggregate adoption, and refuge choice — for regulatory costs are examined. Empirical examples illustrate how providing multiple refuge options significantly reduces regulatory costs.     

A structural model of cost pass-through: the case of the US yogurt retailing

We provide a structural framework for retail cost pass-through based on a neoclassical inverse demand model and retail profit maximization conditions. Unlike previous literature where game-theoretic structures are imposed on cost pass-through, our framework allows for estimating cost pass-through and the degree of market competition simultaneously. Further, our model incorporates potential cross-brand effects representing demand substitution and strategic complementarity effects. Our model supplements the traditional reduced-form approach to pass-through and is applicable in environments, where the lack of brand-level cost data renders reduced-form analysis infeasible. The empirical value of our model is illustrated in an econometric analysis of retail pass-through for national and store brand yogurt. Our results indicate that: (1) market competition has a positive impact on own-brand cost pass-through, especially for national brands, and (2) overlooking cross-brand effects results in biased own-brand pass-through estimates. Finally, we provide a graphical illustration of the relationship between cost pass-through and market competition.     

品牌经济学的理论基础——引入品牌的需求曲线及其经济学分析

把品牌引入经济学后,品牌信用度的提高使得需求曲线发生变化,一方面在其他条件不变的情况下,品牌信用度的提高将有效地降低消费者的选择成本,消费者“趋利避害”的本性使得在任意价格下需求量增加,需求曲线右移;另一方面品牌信用度的提高使得品牌商品的需求弹性变小,需求曲线变陡峭。引入品牌后改变了需求曲线的位置和形状乃品牌经济学的理论基础。在此基础上,品牌信用度的提高通过改变需求曲线的位置将使得均衡价格提高,且均衡数量增加,同时将会增加消费者剩余和生产者剩余,提高社会福利水平。     

Monopoly,product differentiation and economic welfare

This paper discusses the pricing behavior of a monopolistic producer supplying several quality-differentiated goods by using a model of a Lancasterian characteristic approach with consumer's taste pattern dispersed. It examines how finer product differentiation, which is made by the producer by means of the introduction of a new good, changes the price structure and consumer's welfare. It will be establised that the entry of a new good imposes quite different impacts on the price of the goods of higher quality and on those of lower-quality goods.     

Price Discrimination with Private and Imperfect Information

In this paper, I investigate the competitive and welfare effects of the improvements in information accuracy in markets where firms can price discriminate after observing a private and noisy signal about a consumer's brand preference. I show that when firms believe that consumers have a brand preference for them, then they charge more to these consumers, and this price has an inverse U‐shaped relationship with the signal's accuracy. In contrast, the price charged after a disloyal signal has been observed falls as the signal's accuracy rises. While industry profit and overall welfare fall monotonically when price discrimination is based on increasingly more accurate information, the reverse happens to consumer surplus.     

Service sharing,profit mode and coordination mechanism in the Online-to-Offline retail market

How does the sharing economy affect the retail industry? This study investigates the impact of service sharing on the decisions and profits of two profit modes in the Online-to-Offline (O2O) retail market. We find that service sharing always improves the profit of the brand supplier as a service demander in both two profit modes, and improves the profit of the offline franchisee as a service provider in the profit-sharing mode under certain circumstances, but always reduces its profit in the non-profit-sharing mode. This is associated with the double marginalisation effect of the non-profit-sharing mode which leads to channel conflicts. Thus, a service-cost sharing mechanism is introduced to coordinate conflicts and achieve a win-win strategy, thereby improving the performance of the entire O2O supply chain.     

On the use of labels in credence goods markets

We analyze credence goods markets in the case of two firms. Consumers know that the quality of the good varies but do not know which firm is of high quality. First, we show that the high quality producer may be unable to monopolize the market, or even to survive in some cases, in situations where it is efficient and trusted by all consumers. Second, although a label restoring full information improves welfare, it may also reduce both firms’ profits by intensifying competition. Since even the high quality producer may not wish to label its product, in such cases the label must be mandatory. Third, an imperfect label which moves everybody’s beliefs closer to the truth without restoring full information may produce adverse results on market structure and welfare, either by increasing or by reducing the variance of beliefs.      

Mixed duopoly,privatization, and subsidization with excess burden of taxation

We investigate optimal tax‐subsidy policies in mixed and private oligopolies with excess burden of taxation. We compare the optimal subsidies and the resulting welfare levels among four regimes: mixed and private Cournot duopolies and Stackelberg competition with public and private leaderships. We show that, in contrast to the existing works on the privatization neutrality theorem, privatization affects resulting welfare.     

TO LIST OR TO MERGE? ENDOGENOUS CHOICE OF PRIVATIZATION METHODS IN A MIXED MARKET

When and how to privatize a public firm? This paper suggests that a welfare‐enhancing privatization may be triggered by a negative demand shock. When the shock is relatively mild, it is optimal to privatize a public firm by means of stock market listings; when the shock is sufficiently large, a public–private‐firm merger becomes optimal. This paper also considers a government that cares about privatization revenues and about social welfare. It characterizes how the weight attached to privatization revenues and the improvement in production efficiency of the privatized public firm through a stock market listing may affect the government's choices concerning privatization.