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Abstract
Prior empirical research on store brands using cross-category data suggests a counterintuitive result that the lower the price of the store brand relative to the prices of the national brands, the smaller is the market share of the store brand. This result has been interpreted to imply that the national brand-store brand price differential is not an important determinant of private label share - if anything it works in the opposite direction. Using economic analysis, we show that the relationship between price differential and private label share estimated using cross-category data can be just the opposite of the relationship that actually exists within a category. Explains why this reversal occurs and discusses the implications for managers.
Introduction
Private labels or store brands are brands owned, controlled, and sold exclusively by the retailers. Private labels have performed quite well in Europe (Fitzell, 1992). Recently, in the USA, they have gained a substantial market share in grocery products (Deveny, 1992; Hoch and Banerji, 1993). According to the Food Marketing Institute, the percentage of grocery shoppers buying private labels increased from 37 percent in 1990 to 44 percent in 1991 (Holton, 1992). Private labels now account for over 50 percent market share in milk, frozen vegetables, and some first-aid products, and are gaining shares even in categories such as cereals, cigarettes, and diapers, which were considered bastions of national brands (Strauss, 1993)
One important basis for selling private labels is the price differential between store brands and national brands. It is believed that private labels gain sales by offering the brand at a price lower than that of the national brands. As a result, national brand manufacturers are cutting prices and reducing the price gap in order to gain market share from private labels, as well as protect themselves from private label encroachment. For instance, in response to the threat from private labels and discount brands, Philip Morris reduced its price of Marlboro cigarettes, and Procter & Gamble reduced its price of Pampers diapers and Tide detergents (Ortega and Stern, 1993).
However, a number of recent cross-category studies (Hoch and Banerji, 1992; McMaster, 1987; Raju and Dhar, 1991; Sethuraman, 1992) have found a negative relationship between price differential and private label share across categories;...