What Can the Price Gap between Branded and Private-Label Products Tell Us About Markups?

Abstract

We empirically study the market power of U.S. national brand manufacturers by estimating the size of markups for nationally branded products sold in the U.S. retail grocery industry. We use scanner data from a large Midwestern supermarket chain to compute several different measures of upper and lower bounds on national brand manufacturers' markup ratios for more than 230 nationally branded products in 19 categories. The method we use is based on the idea that retail and wholesale prices of private label products provide information on marginal costs that are also applicable to the appropriately matched nationally branded products. Under reasonable assumptions - the accuracy of which we consider in some detail - the wholesale price of a private label product is an upper bound for the marginal manufacturing cost of its nationally branded equivalent, while the retailer's margin on the national brand is an upper bound on the retailer's marginal handling cost for both the brand and private label versions. Using this methodology, we find that lower bounds on the 'full' markup ratio range from 3.44 for toothbrushes and 2.23 for soft drinks to about 1.15-1.20 for canned tuna and frozen entrees, with the majority of categories falling in the range 1.40-2.10. We find that lower bounds on manufacturers' markups are even higher. The data, therefore, indicate that markups on nationally branded products sold in U.S. supermarkets are large.

Keywords: Markup, Retail and Wholesale Price, Marginal Cost, National Brand, Private Label, Transaction Price Data, Upper and Lower Bounds on Markup, Market Power, Advertisement, Quality

JEL Classification: D4, E30, E31, E32, L10, L11, L15, L16, L8