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Abstract
This paper develops and tests different theoretical models of competition in a vertically linked
market assuming different production arrangements for retailer private label brands (PL). We
then empirical estimate retailer manufacturer competitive behavior based on best-fit games and
determine the impact of PL production arrangements on pricing strategies for PLs and NBs.
Retailers are using different production arrangements to produce PL products. In fact, a retailer
may own a production facility, a national brand manufacturer (NB) produces the PL product
exclusively for the retailer or the retailer outsources PL production to a non-NB manufacturer.
These possible, different production arrangements can have significant implications for the
competitive interactions and market outcomes between retailers and NB manufacturers. Existing
economic literature has identified a significant degree of variation in the type of competitive
interactions across grocery product categories. However, the majority empirical studies in IO
have typically imposed assumptions about the nature of vertical production arrangement without
formally and explicitly investigating the nature of PL-NB competitive interaction under different
production arrangements.
The analysis builds on the Non-Nested Model Comparison (NNMC) approach and employs
weekly store-level retail scanner data, for a major North American retail chain. The findings
from different theoretical models and their empirical application reveal that no consistent pattern
of competitive interactions exists between PLs and NBs across different food product categories.
Competitive patterns and outcomes vary depending on the nature of the PL production
arrangement. Our study contributes to the IO literature by being the first to consistently derive
and estimate the impact of PL production arrangement on brand-level competition.