Food Marketing Policy Center Assessing the Impact of Retailer Store Brand Presence on Manufacturer Brands in an Equilibrium Framework

This article assesses the impact of retailer own-labeled products on manufacturer brand prices, profitability, and consumer welfare. Using chain-level retail scanner data from Boston’s white fluid milk market the analysis estimates a random coefficients logit demand model employing a mathematical programming equilibrium constraint(MPEC) method. One can compute profit margins implied for a set of pricing games using estimated demand parameters. Nonparametrically identified non-nested tests identify the most likely pricing game for the Boston white fluid milk market. Results from this analysis indicate that branded milk manufacturers are Stackelberg leaders to retailers and store brand milks are procured at or near cost. This baseline model of the market is matched against a series of counterfactual markets to assess the impact of strong store brands. One counterfactual simulation considers the absence of the leading retailer’s own labeled milk. Another considers the market without store brand milks. Simulation results indicate that strong store brands increase channel profits, retailer profits, and consumer welfare, while having mixed ef†We thank Alessandro Bonanno, Jean-Pierre Dubé, Avi Goldfarb, Sylvie Tchumtchoua, and Gautam Tripathi for valuable discussions and comments leading to improvements in this paper. Remaining errors are our own. fects on equilibrium manufacturer brand retailer prices. In addition results testify that with no store brand milk consumer welfare is approximately 11.5% lower.