Quality choices in a vertical structure: national brands vs private labels in grocery retailing.

Abstract

The paper analyzes quality choices in a vertical structure involving a monopolist food manufacturer (national brand-NB producer) and a monopolist retailer supplying both the national brand as well as a private label (PL). The analysis is based on a threestage dynamic game. According to the results, in the Nash equilibrium the two players choose the maximum possible qualities for their products. This means that the B food manufacturer seeks the maximum product differentiation, while the LP retailer seeks the minimum product differentiation. The behavior of the two players appears to be consistent with actual developments in the food markets as well as with earlier empirical studies documenting the efforts of NB food manufacturers to increase product differentiation.