The economics of quality-equivalent store brands

A key change in the retail environment over the last 20 years has been the emergence and growth of low priced quality-equivalent store brands. National brand manufacturers with popular products seem to help retailers by supplying them with quality-equivalent store brands that are then sold for lower prices. Nevertheless, empirical research has found that this phenomenon often leads to higher average category prices. We explain this apparent contradiction using a model where a national brand manufacturer supports its product with advertising and the retailer may introduce a store brand to better serve its customers. Our analysis shows that when both the manufacturer and the retailer have market power, the launch of a quality-equivalent store brand by the retailer can lead to higher average category prices. Rather than leading to what some call “private label competition”, both the manufacturer and the retailer benefit with the launch of quality-equivalent store brands. As a result, even a dominant manufacturer has an incentive to agree to a retailer's request to supply a quality-equivalent store brand.