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The Economics of quality-equivalent store brands

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A key change in the retail environment over the last 20 years has been the emergence and growth of lower-priced quality-equivalent store brands. Nevertheless, advertising on national brands has continued to rise and in may categories average prices have increased. The authors explain this apparent contradiction using a model where a national brand manufacturer engages in heavy advertising and its retailer introduces a store brand to better serve its customers. Their analysis shows that when both the manufacturer and the retailer have market power, the launch of quality-equivalent store brands can lead to either higher or lower average category prices. In addition, both members of the channel benefit when quality-equivalent store brands are launched. As a result, a dominant manufacturer often agrees to a retailer's request to supply a quality-equivalent store brand.

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