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National brands versus private-labels: an empirical study of competition, advertising and collusion

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We consider certain aspects of competition between national brands and quality-equivalent private-label brands (a form of store, house or own-label branding). We investigate the impact of advertising on the ability of brands to increase market power using a model of Cournot competition. Supporting recent theoretical arguments (though contradicting others), our industry study reveals that heavy advertising among national brands can increase prices, revenues, and profits for both national brands and private-label brands. We find that all players can peacefully co-exist: national brands collute amongst themselves, private-label brands collute amongst themselves, and national brands collute with private-label brands. This holds despite price dispersion across brands, with private-label brands being sold at lower prices. Model outcomes are quantitatively validated by cross- competitor correlations which reveal perfectly synchronized pricing strategies, and qualitatively validated by industry interviews

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en

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application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/Inseadwp1995/95-32.pdf

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Copyright INSEAD. All rights reserved