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  • Print publication year: 2015
  • Online publication date: August 2015

2 - Bayer or Walgreen's? The relationship of premium and value brands in the United States

from PART I - Brands, price theory and business studies' perspectives

Summary

Introduction

There are substantial sales of ‘private label’ or ‘store brands’ for many consumer goods, and relatively modest sales in others. The presence and effects of store brands can have important implications for retail pricing strategy, product positioning, and brand management. For example, if a national brand is considering lowering its price, would the national brand likely take sales away from a store brand and potentially irritate the retailer?

Not surprisingly, a number of researchers have studied various aspects of the competitive interaction between national brand and store brand. To test some of these results, we use store-level scanner data from Dominick's Fine Foods, a large United States retail chain now out of business, to study the interactions of national and store brands. In particular, we see if store brands provide a competitive constraint on national brands similar to the constraint that other national brands provide. We independently estimate own-and cross-price elasticities in bathroom tissues (where several national brands compete with the retailer's brand). In addition, we estimate the independent impact of promotion on own and competitor sales. Finally, we discuss some of the implications of our findings for strategic analysis of pricing and promotion. The analysis of promotions and the effectiveness of store brand competition have not been the primary focus in previous research.

In brief, we find the following:

• National brands sales are often more price-sensitive than store brands.

• National brands often compete more closely with one another than with store brands.

• Price changes in national brands often affect sales of store brands more than store brand price changes affect national brands.

• The entry of store brands can lead to an increase in the own-price elasticities of national brands.

• Promotions affect sales independent of actual prices in economically predictable ways.

The use of elasticity to assess the competitive interaction between national brands and store brands

Analysis of the competitive interaction of consumer goods can provide useful insights for business pricing and promotional strategies. For example, suppose there are four brands in a product category, three national brands, A, B, and C, and a store brand D. Following Green and Alston, let εij represent demand elasticity for brand i with respect to the price of brand j. That is, εij is the percentage change in quantity demanded of good i due to a percentage change in the price of good j.