Advertisement

Quantitative Marketing and Economics

, Volume 8, Issue 3, pp 333–363 | Cite as

Do private labels increase retailer bargaining power?

  • Sergio Meza
  • K. Sudhir
Article

Abstract

Like any new product, private label entry increases competition within a category leading to downward pressure on both wholesale and retail prices. But, given the higher margins for private labels and potential bargaining benefits for retailers, they have incentives to help private labels gain market share. The paper addresses two questions: First, do private labels enhance a retailer’s bargaining power with respect to manufacturers? Second, given the higher profitability and potential increase in bargaining power, does the retailer strategically set retail prices to favor and strengthen the private label? We find support for the “bargaining power” hypothesis, but qualified support for the “strategic retailer pricing” hypothesis. Retailers gain bargaining power through lower wholesale prices on imitated national brands. But the gain is greater in niche categories than in mass categories, suggesting that niche national brands with limited “pull” power lose greater bargaining power. In terms of strategic pricing, the retailer, on initially introducing the private label, strategically sets prices to help private labels gain market share in high volume mass market categories. But retail prices revert to the category profit maximizing price after a year when the private label gains a stable market share.

Keywords

Store brands Retailing Private labels Bargaining breakfast cereal Positioning Channels 

JEL Classification

L11 M31 D40 C10 C30 

References

  1. Ailawadi, K., & Harlam, B. (2004). An empirical analysis of the determinants of retail margins: the role of store brand share. Journal of Marketing, 68(1), 147–166.CrossRefGoogle Scholar
  2. Ailawadi, K., Pauwels, K., & Steenkamp, J.-B. E. M. (2008). Private label use and store loyalty. Journal of Marketing, 72(6), 19–30.CrossRefGoogle Scholar
  3. Berry, S. T. (1994). Estimating discrete-choice models of product differentiation. The Rand Journal of Economics, 25(2), 242–262.CrossRefGoogle Scholar
  4. Berry, S. T., Levinsohn, J., & Pakes, A. (1995). Automobile prices in market equilibrium. Econometrica, 63(4), 841–890.CrossRefGoogle Scholar
  5. Besanko, D., Dubé, J.-P., & Gupta, S. (2003). “Competitive price discrimination strategies in a vertical channel with aggregate data”, with David Besanko and Sachin Gupta. Management Science, 49(9), 1121–1138.CrossRefGoogle Scholar
  6. Blattberg, R. C., & Wisniewski, K. J. (1989). Price-induced patterns of competition. Marketing Science, 8, 291–309.CrossRefGoogle Scholar
  7. Che, H., Sudhir, K., & Seetharaman, P. B. (2007). Bounded rationality in pricing under state dependent demand: do firms look ahead? How far ahead? Journal of Marketing Research, 44(3), 434–449.CrossRefGoogle Scholar
  8. Chintagunta, P. K. (2002). Investigating category pricing behavior at a retail chain. Journal of Marketing Research, 39(2), 141–154.CrossRefGoogle Scholar
  9. Chintagunta, P. K., Bonfrer, A., & Song, I. (2002). Investigating the effects of store brand introduction on retailer demand and pricing behavior. Management Science, 48(10), 2002.CrossRefGoogle Scholar
  10. Corstjens, M., & Lal, R. (2000). Building store loyalty through store brands. Journal of Marketing Research, 37, 281–291.CrossRefGoogle Scholar
  11. Cotterill, R. W., Putsis, W. P., & Dhar, R. (2000). Assessing the competitive interaction between store brands and national brands. Journal of Business, 73(1), 109–137.CrossRefGoogle Scholar
  12. Dhar, S. K., & Hoch, S. J. (1997). Why store brand penetration varies by retailer. Marketing Science, 16(3), 208–227.CrossRefGoogle Scholar
  13. Draganska, M., Klapper D., & Villas-Boas, S. B. (2010). A larger slice or a larger pie? An empirical investigation of bargaining power in the distribution channel. Marketing Science 29(1), 57–74.Google Scholar
  14. Giblen, G. M. (1993). Summit conference defines future. Grocery Marketing, 53, 32–37.Google Scholar
  15. Hoch, S. J. (1996). How should national brands think about store brands? Sloan Management Review, 37(2), 89–102.Google Scholar
  16. Hoch, S. J., & Banerji, S. (1993). When do store brands succeed? Sloan Management Review, 34(4), 57–67.Google Scholar
  17. Hoch, S. J., Montgomery, A. L., & Park, Y.-H. (2006). Long-Term Growth trends in private label market shares, Working Paper.Google Scholar
  18. Iyer, G., & Villas-Boas, M. (2003). A bargaining theory of distribution channels. Journal of Marketing Research, 40, 80–100.Google Scholar
  19. Kadiyali, V., Vilcassim, N., & Chintagunta, P. K. (2000). Power in manufacturer-retailer interactions: an empirical investigation of pricing in a local market. Marketing Science, 19(2), 127–148.CrossRefGoogle Scholar
  20. Lal, R. (1990). Price Promotions: Limiting Competitive Encroachment. Marketing Science, 9(3), 247–262Google Scholar
  21. Meza, S., & Sudhir, K. (2006). Passthrough timing. Quantitative Marketing and Economics, 4(4), 351–382.CrossRefGoogle Scholar
  22. Misra, S., & Mohanty, S. K. (2008). Estimating Bargaining Games in Distribution Channels. Working Paper.Google Scholar
  23. Narasimhan, C., & Wilcox, R. T. (1998). Store brands and channel relationship: a cross-category analysis. Journal of Business, 71(4), 573–600.CrossRefGoogle Scholar
  24. Nevo, A. (2000). A practitioner’s guide to estimation of random coefficients logit models of demand. Journal of Economics & Management Strategy, 9(4), 513–548.CrossRefGoogle Scholar
  25. Nevo, A. (2001). Measuring market power in the ready to eat cereal industry. Econometrica, 69(2), 307–342.CrossRefGoogle Scholar
  26. Pauwels, K., & Srinivasan, S. (2004). Who benefits from store brand entry. Marketing Science, 23(3), 364–390.CrossRefGoogle Scholar
  27. Raju, J., Sethuraman, R., & Dhar, S. K. (1995). The introduction and performance of store brands. Management Science, 41(6), 957–978.CrossRefGoogle Scholar
  28. Sayman, S., Hoch, S. J., & Raju, J. (2002). Positioning of store brands. Marketing Science, 21(4), 378–397.CrossRefGoogle Scholar
  29. Scott-Morton, F., & Zettelmeyer, F. (2004). The strategic positioning of store brands in retailer-manufacturer negotiations. Review of Industrial Organization, 24, 161–194.CrossRefGoogle Scholar
  30. Seenivasan, S., Talukdar, D., & Sudhir, K. (2009). Store Brand Loyalty and Store Performance. Working paper.Google Scholar
  31. Sethuraman, R. (1995). A meta-analysis of national brand and store brand cross-promotional price elasticities. Marketing Letters, 6, 4. 275–286.CrossRefGoogle Scholar
  32. Sethuraman, R. (2000). What Makes Consumers Pay more for National Brands than for Store Brands—Image or Quality? Working Paper, Southern Methodist University.Google Scholar
  33. Starzynski, G. (1993). The private label consumer: is there one? Northbrook: AC Nielsen.Google Scholar
  34. Sudhir, K. (2001a). Competitive pricing behavior in the US auto market: a structural analysis. Marketing Science, 2001, 42–60.CrossRefGoogle Scholar
  35. Sudhir, K. (2001b). Structural analysis of competitive pricing in the presence of a strategic retailer. Marketing Science, 2001, 244–264.CrossRefGoogle Scholar
  36. Sudhir, K., & Talukdar, D. (2004). Does store brand patronage improve store patronage? Review of Industrial Organization, 24(2), 143–160.Google Scholar
  37. Van Nierop, E., Fok, D., & Franses, P. H. (2008). Interaction between shelf layout and marketing effectiveness and its impact on optimizing shelf arrangements. Marketing Science, 27(6), 1065–1082.CrossRefGoogle Scholar
  38. Van Heerde, H. J., Leeflang, P. S. H., & Wittink, D. R. (2001). Semiparametric analysis to estimate the deal curve. Journal of Marketing Research, 38(2), 197–215.CrossRefGoogle Scholar
  39. Villas-Boas, J. M., & Zhao, Y. (2005). Retailers, manufacturers, and individual consumers: modeling the supply side in the ketchup marketplace. Journal of Marketing Research, 42(1), 83–95.CrossRefGoogle Scholar
  40. Villas-Boas, S. B. (2007). Vertical relationships between manufacturers and retailers: inference with limited data. Review of Economic Studies, 74(2), 625–652.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Rotman School of ManagementUniversity of TorontoTorontoUSA
  2. 2.Yale School of ManagementNew HavenUSA

Personalised recommendations