The Role of Strategic Pricing by Retailers in the Success of Store Brands

Posted: 24 Jun 2004

See all articles by K. Sudhir

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

Sergio Meza

University of Guelph

Date Written: January 2003

Abstract

A number of papers have evaluated demand and cost based explanations for the rapid growth and success of store brands. However there has been little empirical investigation of the strategic role of the retailer in facilitating the success of store brands. In this paper, we examine the pricing behavior of a retailer in the ready to eat (RTE) breakfast cereal category in investigating whether and how a retailer strategically favors store brands. Our key result is as follows: After introducing the store brand, the retailer disfavors national brands that it imitates (and is therefore in greater competition) by charging higher margins. In contrast, it treats the national brands that it did not imitate (and therefore in less competition) more favorably by charging lower margins. Thus somewhat counter intuitively, some national brands actually benefit from the store brand introduction. However such strategic behavior happens only in market segments that are attractive to the retailer in terms of market size and the opportunity to steal share from the leading brand. There is no difference in the treatment of imitated and non-imitated brands in the non-attractive segments. We show that a naive approach to infer retailer behavior without considering such segment level differences can lead to wrong and misleading inferences about the retailer's strategic pricing. We discuss the managerial implications of our results for pricing and product positioning of national brands.

Keywords: Store brands, retailing, competition, breakfast cereal

JEL Classification: C33, C50, D43

Suggested Citation

Sudhir, K. and Meza, Sergio, The Role of Strategic Pricing by Retailers in the Success of Store Brands (January 2003). Available at SSRN: https://ssrn.com/abstract=558188

K. Sudhir (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
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203-432-3289 (Phone)
203-432-3003 (Fax)

Yale University-Department of Economics ( email )

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United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Sergio Meza

University of Guelph ( email )

Guelph, Ontario
Canada

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