Skip to main content

Advertisement

SpringerLink
Log in

Strategic supermarket pricing of private labels and manufacturer brands

  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

Large, low-cost entrants can have a disrupting impact on incumbents. Supercenters may influence competing supermarkets’ prices, but their effects on competition between supermarkets’ private labels and manufacturer brands remain poorly understood. This study examines the impact of Wal-Mart Supercenters on supermarkets’ strategic use of private labels and the control they may exercise over the pricing of manufacturer brands. We use a structural model to investigate alternative pricing scenarios in which the supermarkets have varying control over manufacturer-brand retail prices. The analysis is applied to the milk market in the Dallas/Fort Worth metroplex in an early period of Supercenter growth: 1996–2001. We find that Wal-Mart induces supermarkets to price their private label more competitively and has a very small effect on the pricing of the manufacturer brand. We also identify the type of consumers Wal-Mart Supercenters can attract from supermarkets, leaving incumbents to face a different composition of consumers. Consumers that continue shopping at traditional supermarkets are found to be less price-sensitive, view incumbents as less heterogeneous, and experience the manufacturer brand as more differentiated from private labels.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. Wal-Mart was re-branded as Walmart and the Supercenter name was phased out in 2008; we use the original branding because: (1) it is contemporaneous with the time period of analysis and (2) we focus only on Wal-Mart stores selling a full line of grocery products.

  2. In some cases, differentiated firm entry can lead incumbents to increase prices as an optimal response, a theoretical argument formalized by Chen and Riordan (2008) and documented empirically by Frank and Salkever (1997) in pharmaceuticals.

  3. The effects of WMS on the conduct of upstream firms have not been investigated mainly due to a lack of data, which, with current methodologies, renders the investigation of strategic interactions via a structural model of the vertical channel infeasible.

  4. Our model is one of horizontal competition between brands, and we do not directly study supply chain effects.

  5. Using data from 1994 to 2006 Ellickson and Grieco (2013) show that WMS’ entry had a lesser impact on the food retailing sector than Wal-Mart’s Discount Stores had on the general merchandise sector.

  6. Our case study focuses on milk, and our findings may not apply to other products.

  7. Retailers can differentiate by size, quality (Matsa 2011; Ellickson 2006), and level of service (Bonanno and Lopez 2009), among other attributes. During the time period investigated (1996–2001), the prominence of plant-based milks was limited and they are not included in the analysis.

  8. An early hypermart was converted in 1990.

  9. Hypermart USA primarily failed due to the costs associated with its huge footprint, which exceeded 220,000 sq ft (vs the approximately 178,000 sq ft of a Supercenter) and functioned as mini-malls and included food courts.

  10. Even thirty years later, understanding the effects during this initial period of WMS’ growth is difficult. In recent years, Wal-Mart has disclosed location and sales data to market research firms. However, information on these early years has still not been released.

  11. Anecdotally, a Dallas/Fort Worth newspaper reported that although Kroger claimed to be the first to cut prices which “corresponded to a slight decline in raw milk prices,” it was more motivated by providing value to their customers and increasing volume at its local dairy (Press 1999). The same article describes Minyard and Albertsons responding to Kroger’s price cut by lowering their own prices (Press 1999).

  12. The correlation between one-, two-, and three-month lags is, respectively, 0.1216, 0.1289, and 0.1270 indicating that retail price correlation with lagged farm milk price is also low. These are smaller than values observed by researchers studying other markets (e.g., Yu and Gould 2019; Carman and Sexton 2005).

  13. The result is similar if we transform the variables to logs, with a statistically significant raw milk price coefficient of 0.43 and an \(R^{2}\) of 0.0198.

  14. For a more general discussion of the benefits of alternative discrete choice approaches to model demand see Grigolon and Verboven (2014) and Björnerstedt and Verboven (2012) whose findings support the use of the nested logit model in competition policy analysis.

  15. Given the lack of data on WMS, we treat WMS as one of the purchase decisions in the outside option.

  16. The ways in which we modify the model to account for the expansion of WMS are ad hoc.

  17. For example, in the absence of WMS, incumbent stores may be crowded and, as consumers leave incumbents to shop at WMS, incumbent stores can become less crowded (which can mean shorter lines and more attention from store employees, at least in the short run).

  18. We are allowing product and consumer characteristics to interact only among factors common to each brand and retailer, respectively, similar to using fixed effects.

  19. We tested whether \(\sigma _{J}\) and \(\sigma _{I}\) satisfy the theoretical bounds (to be between 0 and 1) within the range of the data and found that they did.

  20. The ownership matrices corresponding to the pricing scenarios are fully illustrated in the Appendix in Tables 9–11.

  21. These data are unique in that they provide quantity and prices for complete market coverage of grocery retailers, excluding only WMS (i.e., all retailers opted in to inclusion which is not true of all IRI retailer data sets available). Their use in research outputs also does not require approval by IRI, as use of more nationally representative sets that are available do.

  22. Fringe manufacturer brands and leading national brands may behave differently and aggregating these two together may have implications for our results, namely, if the leading national brand has a large share of the market, it may underestimate the degree of power of the leading national brand by diluting its effect with the fringe. This is an empirical issue and in the specific case studied here Borden has a share of approximately 14% of aggregated incumbent volume sales; the next largest manufacturer brand is Morningstar with about 9% of incumbent volume sales; the remaining brands comprise about 5% of incumbent volume sales. Further, each manufacturer brand’s share of volume sales in each retailer (excluding Minyard) is less than 10%, including Borden.

  23. Each retailer’s store brand is sold exclusively via their supermarkets and therefore is not a purchase option at other retailers’ stores.

  24. This was done using the serving size suggested by the USDA Food Guide Pyramid (USDA (1992 - 2005)), which are assumed to be at least proportional to the “true” serving size. The total market size is defined as \(\tau *\mathrm {population}*0.075\) gallons\(*28\) days, with \(\tau \) assumed equal to 1, following Nevo (2001); results are robust to scaling \(\tau \).

  25. Other work using discrete choice models has used ranges of the share of the outside option to be from 91% to 35% (Dubé, Fox, and Su 2012; Nevo 2001; Berry, Levinsohn, and Pakes 1995).

  26. Thanks to an anonymous reviewer for highlighting the importance of promotions. See Cleary and Lopez (2014) for use of strategic promotions in this market.

  27. We also tried other modifications of this extrapolation; results are largely robust and are available in the Appendix.

  28. The national number of WMS and W have an unconditional correlation coefficient of 0.95, which is significant at the 1% level. Their correlation remains unchanged during the period of low pricing. The period of low pricing explains less than 10% of the variation in W, and the national number of WMS explains about 90%; together, they explain about 90% as well.

  29. Calculated as (\(\sigma _{0J}+\sigma _{1J}*12)\).

  30. Note that the bounds of \(\sigma \) include 0, so that this finding is consistent with the theory presented in previous sections.

  31. Anecdotally, according to a newspaper report at the time, a spokesperson for Minyard claimed that while they tried to match the prices of other stores, most times it was not feasible. A spokesperson for Tom Thumb said it is part of their business model to “keep milk prices competitive” (Press 1999).

References

  • Ailawadi KL, Harlam B (2004) An empirical analysis of the determinants of retail margins: the role of store-brand share. J Mark 68:147–165

    Article  Google Scholar 

  • Ailawadi KL, Zhang J, Krishna A, Kruger MW (2010) When Wal-Mart enters: how incumbent retailers react and how this affects their sales outcomes. J Mark Res 47:577–593

    Article  Google Scholar 

  • Allender WJ, Richards TJ (2010) Market diversion and market power: California eggs. Rev Ind Organ 36:37–58

    Article  Google Scholar 

  • Arcidiacono P, Ellickson PB, Mela CF, Singleton JD (2020) The competitive effects of entry: evidence from supercenter expansion. Am Econ J Appl Econ 12:175–206

    Article  Google Scholar 

  • Baker JB, Bresnahan TF (1985) The gains from merger or collusion in product-differentiated industries. J Ind Econ 33:427–444

    Article  Google Scholar 

  • Basker E (2007) The Causes and Consequences of Wal-Mart’s Growth. J Econ Perspect 21:177–198

  • Basker E (2005) Job creation or destruction? Labor market effects of Wal-Mart expansion. Rev Econ Stat 87:174–183

    Article  Google Scholar 

  • Basker E, Noel M (2009) The evolving food chain: competitive effects of Wal-Mart’s entry into the supermarket industry. J Econ Manag Strategy 18:977–1009

  • Basuroy S, Mantrala MK, Walters RG (2001) The impact of category management on retailer prices and performance: theory and evidence. J Mark 65:16–32

    Article  Google Scholar 

  • Berry S (1994) Estimating discrete-choice models of product differentiation. Rand J Econ 25:242–262

    Article  Google Scholar 

  • Berry S, Levinsohn J, Pakes A (1995) Automobile prices in market equilibrium. Econ J Econ Soc 63:841–890

    Google Scholar 

  • Björnerstedt J, Verboven F (2012) Does merger simulation Work? A natural experiment in the Swedish analgesics market. Working paper, KU Leuven, Faculty of Economics and Business, Department of Economics

  • Bonanno A (2010) An empirical investigation of Wal-Mart’s expansion into food retailing. Agribusiness 26:220–242

  • Bonanno A, Huang R, Liu Y (2014) Simulating welfare effects of the European nutrition and health claims’ regulation: the Italian yogurt market. Eur Rev Agric Econ 42:499–533

  • Bonanno A, Lopez R (2012) Wal-Mart’s monopsony power in metro and non-metro labor markets. Reg Sci Urban Econ 42:569–579

  • Bonanno A, Lopez RA (2009) Competition effects of supermarket services. Am J Agr Econ 91:555–568

    Article  Google Scholar 

  • Burt S, Sparks L (2001) The implications of Wal-Mart’s takeover of ASDA. Environ Plan A 33:1463–1487

  • Cardell N (1997) Variance components structures for the extreme-value and logistic distributions with application to models of heterogeneity. Economet Theor 13:185–213

    Article  Google Scholar 

  • Carman HF, Sexton RJ (2005) Supermarket fluid milk pricing practices in the Western United States. Agribus Int J 21:509–530

    Article  Google Scholar 

  • Chen Y, Riordan MH (2008) Price-increasing competition. Rand J Econ 39:1042–1058

    Article  Google Scholar 

  • Chintagunta P (2002) Investigating category pricing behavior at a retail chain. J Mark Res 39:141–154

    Article  Google Scholar 

  • Cleary RL, Lopez RA (2014) Supermarket responses to Wal-Mart Supercenter expansion: a structural approach. Empir Econ 47:905–925

    Article  Google Scholar 

  • Cotterill RW, Putsis WP (2000) Market share and price setting behavior for private labels and national brands. Rev Ind Organ 17:17–39

    Article  Google Scholar 

  • Cotterill RW, Putsis WP Jr (2001) Do models of vertical strategic interaction for national and store brands meet the market test? J Retail 77:83–109

    Article  Google Scholar 

  • Di Y, Lopez R, Liu X (2017) The impact of Wal-Mart Supercenters’ entry on incumbent supermarkets’ profit margins: A case study of fluid milk. China Agricultural Economic Review 9:130–140

  • Dobson P, Inderst R (2007) Differential buyer power and the waterbed effect: Do strong buyers benefit or harm consumers? Eur Compet Law Rev 28:393

    Google Scholar 

  • Dubé JP, Fox JT, Su CL (2012) Improving the numerical performance of static and dynamic aggregate discrete choice random coefficients demand estimation. Econometrica 80:2231–2267

    Article  Google Scholar 

  • Duso T, Herr A, Suppliet M (2014) The welfare impact of parallel imports: a structural approach applied to the german market for oral anti-diabetics. Health Econ 23:1036–1057

    Article  Google Scholar 

  • Ellickson PB (2006) Quality competition in retailing: a structural analysis. Int J Ind Organ 24:521–540

    Article  Google Scholar 

  • Ellickson PB, Grieco PL (2013) Wal-Mart and the geography of grocery retailing. J Urban Econ 75:1–14

    Article  Google Scholar 

  • Ellickson PB, Misra S, Nair HS (2012) Repositioning dynamics and pricing strategy. J Mark Res 49:750–772

    Article  Google Scholar 

  • Fernie J, Hahn B, Gerhard U, Pioch E, Arnold SJ (2006) The impact of Wal-Mart’s entry into the German and UK grocery markets. Agribus Int J 22:247–266

  • Foster L, Haltiwanger J, Krizan C (2006) Market selection, reallocation, and restructuring in the US retail trade sector in the 1990s. Rev Econ Stat 88:748–758

    Article  Google Scholar 

  • Frank RG, Salkever DS (1997) Generic entry and the pricing of pharmaceuticals. J Econ Manag Strategy 6:75–90

    Article  Google Scholar 

  • Franklin AW (2001) The impact of Wal-Mart supercenters on supermarket concentration in US metropolitan areas. Agribusiness 17:105–114

    Article  Google Scholar 

  • Gielens K, Van de Gucht LM, Steenkamp JBE, Dekimpe MG (2008) Dancing with a giant: the effect of Wal-Mart’s entry into the United Kingdom on the performance of European retailers. J Mark Res 45:519–534

  • Goolsbee A, Syverson C (2008) How do incumbents respond to the threat of entry? Evidence from the major airlines. Q J Econ 123:1611–1633

    Article  Google Scholar 

  • Grigolon L, Verboven F (2014) Nested logit or random coefficients logit? A comparison of alternative discrete choice models of product differentiation. Rev Econ Stat 96:916–935

    Article  Google Scholar 

  • Hausman J, Leibtag E (2007) Consumer benefits from increased competition in shopping outlets: measuring the effect of Wal-Mart. J Appl Economet 22:1157–1177

    Article  Google Scholar 

  • Hausman J, Leonard G, Zona J (1994) Competitive analysis with differenciated products. Ann Econ Stat 159–180

  • Hicks MJ (2009) Wal-Mart and small business: boon or bane? Rev Reg Stud 39:73–83

    Google Scholar 

  • Hwang M, Park S (2015) The impact of Walmart supercenter conversion on consumer shopping behavior. Manag Sci 62:817–828

    Article  Google Scholar 

  • Inderst R, Shaffer G (2007) Retail mergers, buyer power and product variety. Econ J 117:45–67

    Article  Google Scholar 

  • Jia P (2008) What happens when Wal-Mart comes to town: an empirical analysis of the discount retailing industry. Econ J Econ Soc 76:1263–1316

    Google Scholar 

  • Jindal P, Zhu T, Chintagunta PK, Dhar SK (2018) Point-of-sale marketing mix and brand performance—the moderating role of retail format and brand type. Working paper

  • Khanna N, Tice S (2000) Strategic responses of incumbents to new entry: the effect of ownership structure: capital structure, and focus. Re Financ Stud 13:749–779

    Article  Google Scholar 

  • Kinsey J, Senauer B (1996) Consumer trends and changing food retailing formats. Am J Agr Econ 78:1187–1191

    Article  Google Scholar 

  • Leeflang PS, Wittink DR (1992) Diagnosing competitive reactions using (aggregated) scanner data. Int J Res Mark 9:39–57

    Article  Google Scholar 

  • Liu H, Rizzo JA, Sun Q, Wu F (2015) How do smokers respond to cigarette taxes? evidence from China’s cigarette industry. Health Econ 24:1314–1330

  • Liu L, Dukes A (2016) Consumer search with limited product evaluation. J Econ Manag Strategy 25:32–55

    Article  Google Scholar 

  • Matsa DA (2011) Competition and product quality in the supermarket industry. Q J Econ 126:1539–1591

    Article  Google Scholar 

  • Narasimhan C, Wilcox RT (1998) Private Labels and the channel relationship: across category analysis. J Bus 71:573–600

    Article  Google Scholar 

  • Neumark D, Zhang J, Ciccarella S (2008) The effects of Wal-Mart on local labor markets. J Urban Econ 63:405–430

    Article  Google Scholar 

  • Nevo A (2001) Measuring market power in the ready-to-eat cereal industry. Econ J Econ Soc 69:307–342

    Google Scholar 

  • Press A (1999) Public milk price war. Amarillo Globe News

  • Putsis J, William P (1997) An empirical study of the effect of brand proliferation on private label/national brand pricing behavior. Rev Ind Organ 12:355–371

    Article  Google Scholar 

  • Richards T (2007) A nested logit model of strategic promotion. Quant Mark Econ 5:63–91

    Article  Google Scholar 

  • Richards TJ, Hamilton SF (2006) Rivalry in price and variety among supermarket retailers. Am J Agr Econ 88:710–726

    Article  Google Scholar 

  • Rivers D, Vuong Q (2002) Model selection tests for nonlinear dynamic models. Economet J 5:1–39

    Article  Google Scholar 

  • Rosenthal RW (1980) A model in which an increase in the number of sellers leads to a higher price. Econ J Econ Soc 48:1575–1579

    Google Scholar 

  • Shen C (2017) The effects of major US domestic airline code sharing and profit-sharing rule. J Econ Manag Strategy 26:590–609

    Article  Google Scholar 

  • Singh VP, Hansen KT, Blattberg RC (2006) Market entry and consumer behavior: an investigation of a Wal-Mart supercenter. Mark Sci 25:457–476

    Article  Google Scholar 

  • Smith R, Blundell R (1986) An exogeneity test for a simultaneous equation Tobit model with an application to labor supply. Econ J Econ Soc 54:679–685

    Google Scholar 

  • Sobel R, Dean A (2008) Has Wal-Mart buried mom and pop? The impact on self-employment and small establishments in the United States. Econ Inq 46:676–695

    Article  Google Scholar 

  • Srinivasan S, Leszczyc PTP, Bass FM (2000) Market share response and competitive interaction: the impact of temporary, evolving and structural changes in prices. Int J Res Mark 17:281–305

    Article  Google Scholar 

  • Staiger D, Stock JH (1997) Instrumental variables regression with weak instruments. Econ J Econ Soc 65:557–586

    Google Scholar 

  • Steiner RL (2004) The nature and benefits of national brand/private label competition. Rev Ind Organ 24:105–127

    Article  Google Scholar 

  • Sudhir K (2001) Structural analysis of manufacturer pricing in the presence of a strategic retailer. Mark Sci 20:244–264

    Article  Google Scholar 

  • USDA, C.f.N.P.I.P. 1992–2005. Food guide pyramid. Website

  • Villas-Boas S (2007) Vertical relationships between manufacturers and retailers: inference with limited data. Rev Econ Stud 74:625–652

    Article  Google Scholar 

  • Volpe RJ, Lavoie N (2008) The effect of Wal-Mart supercenters on grocery prices in New England. Appl Econ Perspect Policy 30:4–26

    Google Scholar 

  • Vuong Q (1989) Likelihood ratio tests for model selection and non-nested hypotheses. Econ J Econ Soc 57:307–333

    Google Scholar 

  • Walton S, Huey J (1992) Sam Walton: made in America. Doubleday

  • Ward MB, Shimshack JP, Perloff JM, Harris JM (2002) Effects of the private-label invasion in food industries. Am J Agr Econ 84:961–973

    Article  Google Scholar 

  • Wren W (1999) Milk price drop to 79 cents at some Texas stores. Fort Worth Star Telegram

  • Yu CJ, Gould BW (2019) Market power and farm-retail price transmission: The case of US fluid milk markets. Agribusiness 35:537–555

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Agricultural and Resource Economics, Colorado State University, Fort Collins, USA

    Rebecca Cleary

  2. Agricultural and Applied Economics, University of Wisconsin, Madison, USA

    Jean-Paul Chavas

Authors
  1. Rebecca Cleary
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Jean-Paul Chavas
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Rebecca Cleary.

Ethics declarations

Conflicts of interest

Rebecca Cleary and Jean-Paul Chavas declare that they have no conflicts of interest. This study was supported in part by the Colorado Agricultural Experiment Station.

Ethical approval

This article does not contain any studies with human participants or animals performed by any of the authors.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

We would like to thank the Zwick Center for Food and Resource Policy at the University of Connecticut for sharing the Dallas/Fort Worth milk market data. We are also grateful to two anonymous reviewers, Alessandro Bonanno, Tasneem Chipty, Vardges Hovhannisyan, Rigoberto Lopez, Kyle Stiegert, Guanming Shi, and members of the Food Research Working Group at the University of Wisconsin for conversations that led to a substantially improved manuscript. We also thank seminar participants at the University of Minnesota, the Department of Justice, the Economic Research Service, and Analysis Group for helpful suggestions. All remaining errors are our own. The data that support the findings of this study are available from the Zwick Center for Food and Resource Policy at the University of Connecticut. Restrictions apply to the availability of these data, which were used with permission for this study.

Supplementary Information

Below is the link to the electronic supplementary material.

Supplementary material 1 (pdf 264 KB)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Cleary, R., Chavas, JP. Strategic supermarket pricing of private labels and manufacturer brands. Empir Econ 62, 2921–2950 (2022). https://doi.org/10.1007/s00181-021-02123-2

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00181-021-02123-2

Keywords

Search

Navigation