The Role of Strategic Pricing by Retailers in the Success of Store Brands

A number of papers have evaluated demand and cost based explanations for the rapid growth and success of store brands. However there has been little empirical investigation of the strategic role of the retailer in facilitating the success of store brands. In this paper, we examine the pricing behavior of a retailer in the ready to eat (RTE) breakfast cereal category in investigating whether and how a retailer strategically favors store brands. Our key result is as follows: After introducing the store brand, the retailer disfavors national brands that it imitates (and is therefore in greater competition) by charging higher margins. In contrast, it treats the national brands that it did not imitate (and therefore in less competition) more favorably by charging lower margins. Thus somewhat counter intuitively, some national brands actually benefit from the store brand introduction. However such strategic behavior happens only in market segments that are attractive to the retailer in terms of market size and the opportunity to steal share from the leading brand. There is no difference in the treatment of imitated and non-imitated brands in the non-attractive segments. We show that a naive approach to infer retailer behavior without considering such segment level differences can lead to wrong and misleading inferences about the retailer's strategic pricing. We discuss the managerial implications of our results for pricing and product positioning of national brands