Ronald W. Cotterill

Assessing the Competitive Interaction between Private Labels and National Brands

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.

Market power in the retail food industry: evidence from Vermont

Abstrac-t-The profits of leading firms in concentrated markets may be due to market share related cost efficiencies or market power. One way to identify the separate effect of market power is to analyze the relationship of market concentration and market share to the prices charged by firms in local geographic markets. This study analyzes the prices charged by supermarkets in local Vermont markets. Prices are significantly higher in more concentrated markets. The Herfindahl index, as a concentration measure, out-performs the four-firm or one-firm concentration ratio. Herfindahl marginally out-performs a firms market share as a predictor of its price level.

Market Share and Price Setting Behavior For Private Labels and National Brands

In this paper, we focus on the nature of demand and competitive response in the market for private label and national “branded” grocery products. Specifically,we employ less restrictive functional forms than usedin prior research. Specifically, we incorporateLA/AIDS demands and the corresponding price reactionequations to estimate consumer price sensitivities andsupply side price strategies for national brand andprivate label products. Oligopolistic priceinterdependence is explored further by specifyingbrand share, brand Herfindahl, and a measure of thestructure of the local retail markets in the supplyside relations to evaluate explicitly the impact ofmarket structure.In our empirical analysis, we estimate a system of market share and price equations simultaneously inorder to examine (i) the determinants of the demandresponse to pricing and promotion decisions and (ii)the determinants of private label and national brandpricing behavior. Using data for 143 food productcategories and 59 geographic markets, we develop amodel that captures the variation in privatelabel-national brand share and pricing acrosscategories and markets. Key findings include: (i)demand response to price and promotion is decidedlyasymmetric, (ii) price followship between privatelabels and national brands is positive, but notstrong, and (iii) markets characterized by highernational brand market share and higher supermarketconcentration tend to have higher prices forboth national brands and private labels.

Scanner Data: New Opportunities for Demand and Competitive Strategy Analysis

This paper reviews prior research by agricultural economists on the demand for food products using scanner data. Thereafter, a differentiated products oligopoly model with Bertrand price competition is developed and used to specify brand level demand and oligopoly price reaction equations. The model has sufficient detail to estimate brand level price elasticities and price response elasticities which in turn can be used to estimate three indices of market power. The first index estimated is the familiar Rothschild Index. The paper develops estimates two new indexes, the observed index and the Chamberlin quotient for tacit collusion. It concludes with comments on how the proposed method for the measurement of market power in a differentiated oligopoly can be improved.

Do models of vertical strategic interaction for national and store brands meet the market test

Abstract This article develops a methodology for empirically examining some of the central assumptions commonly used in the theoretical literature on vertical strategic interaction. This methodology is used to test these assumptions by using data for six individual categories across 59 local markets in 1991 and 1992, focusing on the vertical and horizontal interaction between private label and national brands. There are three central findings. First, the vertical strategic interaction observed for national brands varies considerably across categories (a single form of interaction, “Vertical Nash,” tends to be more common for private label brands). Second, we generally reject the use of proportional mark-up behavior by retailers. Third, we reject linear demands in a favor of a more flexible nonlinear form. These results suggest that models specifying proportional mark-up behavior and linear demands do not accurately reflect market reality. Further, because vertical strategic interaction between manufacturers and retailers seems to be idiosyncratic to the category and brand, future research should consider multiple forms of vertical interaction to produce reasonably general results.

The food distribution system of the future: Convergence towards the US or UK model?

This article presents and analyzes a hypothesis that is of fundamental importance for the organization and performance of food systems. That hypothesis is that food manufacturing and distribution systems are converging to a common organizational structure. Two polar opposite organizational structures are the US manufacturer-led model and the UK retailer-led model. The article explains reasons for convergence, compares the US and UK models, and argues for expository purposes only that developed nation food systems well converge to the US manufacturer-led model. The paper discusses key parameters that identify how convergence will occur. The author, however, is not convinced that the US model should win. The UK retailer-led model with its extensive private label program probably offers superior benefits to consumers.

Share, price and category expenditure—geographic market effects and private labels

Focusing on the interaction between national brands and private labels, this paper has two main empirical contributions: (i) a simultaneous system of demand (share), price and expenditure equations is estimated, and (ii) differences in the structure of the local geographic market are incorporated into the analysis. The former represents an important step in understanding the complete nature of private label and national brand interaction, while the latter is important for understanding the impact of the local retail environment on market behaviour. IRI scanner data from 1991 and 1992 are used to estimate a five-equation system across 135 food product categories and 59 geographic markets. The results suggest that concentration at both the manufacturer and retailer level can significantly affect private label and national brand price. However, while increased retailer concentration is associated with higher national brand and private label prices, higher manufacturer concentration is associated with higher national brand but lower private label prices. Increases in national brand advertising has the effect of raising national brand price and share, but lowering private label price and share. This is consistent with previous research and suggests that advertising and local market conditions play a significant role in the ability of national brands to price at a premium over private labels. Finally, marketing decision variables, such as display activity and private label distribution, can have an important impact on total category expenditure. Copyright

Market power and the Demsetz quality critique: An evaluation for food retailing

This study uses factor analysis to identify five service factors that are modeled with price as endogenous variables in a simultaneous equations framework to test whether a more concentrated market structure is related to higher service levels, which, in turn, are related to higher prices (the Demsetz quality critique) or whether a more concentrated market structure is directly related to higher prices (market power hypothesis). For this study of supermarkets in 34 local markets in six southwestern states, market share and concentration are not significantly related to any service factors. However, concentration has a significant positive relationship with price in the full sample, and share also is significantly related to price in subsamples of large, leading firms. Thus, the Demsetz quality critique is rejected. Also coordinated rather than unilateral effects seem predominant. When examining store size, superstores enjoy economics up to 50,000 square feet, but most of the cost savings are offset by pricing power related to increased services levels.

COST PASS-THROUGH IN DIFFERENTIATED PRODUCT MARKETS: THE CASE OF U.S. PROCESSED CHEESE*

In this paper, we estimate a mixed logit model for demand in the U.S. processed cheese market. The estimates are used to determine pass-through rates of cost changes under different behavioral regimes. We find that, under collusion, the pass-through rates for all brands fall between 21% and 31% while, under Nash-Bertrand price competition, the range of pass-through rates is between 73% and 103%. The mixed logit model provides a more flexible framework for studying pass-through rates than the logit model since the curvature of the demand functions depends upon the empirical distribution of consumer types.

Estimating a Brand-Level Demand System for American Cheese Products to Evaluate Unilateral and Coordinated Market Power Strategies

The advantage of this method compared to Baker and Bresnahan (p. 432) is that it does not constrain the conduct of the manager. In their analysis, they assume that the manager proportionally varies the quantity of each brand. Market shares remain constant. Once one has the unilateral, total and fully collusive elasticities, one can analyze the This paper was presented at the ASSA winter meetings (Atlanta, GA, January 2002). Papers in these sessions are not subjected to the journals standard refereeing process. Ronald W. Cotterill is professor of agricultural economics at the University of Connecticut, Department of Agricultural and Resource Economics. He is currently director of the Food Marketing Policy Center and editor of Agribusiness: An International Journal; Pierre O. Samson completed a master of science degree in agricultural economics at the University of Connecticut in 2000.