Is it rational for a large-retailer to sell an own-brand product similar to the branded product of a large manufacturer? A Vertical Product Differentiation Model
Iván Valdés de la Fuente, Gonzalo Escobar Elexpuru
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Abstract
A theoretical model was constructed to investigate the conditions that a large retailer must satisfy to increase the quality of the retailer-owned brands towards a greater number of groceries. The key result shows that the restraint given by a vertical integration scheme (producer-distributor) is relaxed for a higher quality-production cost ratio under the assumption of modelling with endogenous quality. Another finding is that the national brand´s production is not altered, which is explained by the fact that this brand is demanded by consumers with high willingness to pay for it. However, the wholesale price decreases and hence the manufacturer’s profit always falls as the quality of own brands rises. This is consistent with the argument that the retailer improves its negotiation capacity with the private manufacturer when it sells an own brand that is a close substitute for the manufacturer’s label, which always forces the wholesale price of the branded product down. encourage shoppers to choose between the retailer owned brand or national brand. The main results highlight that the pricing decision depends on the market share and profitability, which are affected by the strategies. He argues that when premium brand prices go up, retailer owned brands appear to offer better value.
期刊介绍:
The Revista Desarrollo y Sociedad is an academic and open access journal, published each semester, that belongs to the Centro de Estudios sobre Desarrollo y Sociedad (CEDE) of the School of Economics at Universidad de los Andes (Colombia). The journal seeks to disseminate the investigations and academic projects develop at Universities and Research Centers, at a national and international level; it is addressed to economists and researchers of related fields. The special editions are selected aiming to choose topics highly relevant to the area of Economy. The call for papers is permanently open.