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Market Share and Price-Setting Behavior for Private Labels and National Brands

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Competition between “national brand” and “private label” products has been a primary concern of managers in the retail food industry for some time now. More recently, understanding the different factors that influence the competitive interaction between national brands and private labels has taken on greater urgency. Much of this is due to the inroads made by private-label products in many categories. For example, private-label brands in U.S. supermarkets reached an all-time high unit market share of 20.8 percent in the third quarter of 1997 according to Information Resources, Inc. (IRI) (Brand Week 11/24/97). Yet surprisingly little research has been conducted addressing private-label/ nationalbrand interaction.

A number of studies have addressed competitive interaction more generally. Previous empirical research addressing competitive interaction has taken a variety of forms. For example, the “menu” approach requires specifying, a priori, the alternative forms of competitive interaction to be considered using nonnested hypothesis tests to ascertain which type of interaction best fits the data (see, for example, Roberts (1984); Gasmi, Laffont, and Vuong (1992); and Kadiyali, Vilcassim, and Chintagunta (1996)). Alternatively, conjectural-variation approaches estimate competitive interaction directly without the need to specify the form of the interaction a priori (see, for example, Appelbaum (1979), Putsis and Dhar (1998), and Kadiyali, Vilcassim, and Chintagunta (1998)).

While previous research addressing the nature of competitive interaction has produced sophisticated models on the supply side, demand specifications used in much of that research, including research on private-label/national-brand interaction, have been rather restrictive in functional form in order to derive unambiguous qualitative results or to simplify estimation. For example, theoretical models developed by Choi (1991) and by Raju, Sethuraman, and Dhar (1995a, 1995b) employ restricted versions of a linear demand model. Further, in recent theoretical work, Lee and Staelin (1997) and Cotterill, Egan, and Buckhold (1999) demonstrated that the type of vertical strategic interaction present depends, in part, on the convexity of the demand curve.

Document Type: Research Article

Publication date: January 1, 2006

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