Multi-market Competition in Packaged Goods: Sustaining Large Local Market Advantages with Little Product Differentiation

Local outputs for nationally available brands of packaged goods tend to be spatially concentrated, i.e., the same brand has high outputs in some regions, and low outputs in others. Curiously, such spatial concentration is very persistent despite direct competition between brands and a notable lack of product differentiation. It is shown that the stability of spatial concentration can be explained from two realities of competing in packaged goods, namely multi-market contact of national brand manufacturers and high local positioning cost (e.g., advertising costs or retailer incentives). These explanations gain more weight as the differentiation between brands diminishes. Indeed, a main result of the paper is that when two products are undifferentiated, their observed local outputs are more likely to be asymmetric. A surprising implication of the analysis is that multi-market profits can be higher with high positioning cost than without such cost. This happens when manufacturers have some strong and some weak markets and when positioning costs are a deterrent to seeking a “fair” share in each local market. Positioning costs are more effective in this deterring role when products are again undifferentiated. Another implication of the main result is that firms selling undifferentiated goods should focus on defending their strong markets and stay away from attacking in markets where a competitor leads. JEL Classification: L11, L15, L22, L66, M30, R12