An empirical analysis of the determinants of category expenditure

Abstract

Previous research on the effectiveness of promotions by “private label” and “national” brands has focused primarily on its impact on relative market share. This research has documented the asymmetric nature of promotions between weaker (e.g., private labels) and stronger (e.g., national) brands [Blattberg RC, Wisniewski KJ. Price induced patterns of competition. Mark Sci 1989;8:291–309, Fall; Allenby GM, Rossi PE. Quality perceptions and asymmetric switching between brands. Mark Sci 1991;10:185–204, Summer]. This has led to suggestions that private label promotions make little sense since they are relatively ineffective in stealing share from national brands. However, recent research [Ailawadi K, Neslin SA. The effect of promotion on consumption: buying more and consuming it faster. J Mark Res 1998;35(3):390–98, August; Chandon P, Wansink B. When and why does consumer stockpiling accelerate consumption volume? Unpublished manuscript, London Business School, 1999] suggests that promotions can result in category expansion in addition to brand switching — promotions may not simply be a zero-sum game. If promotions can indeed increase total category consumption they may not need to steal share in order to be profitable. Thus, understanding the determinants of category expenditure can be an important part of properly understanding the market interaction between private labels and national brands. This paper explores the determinants of total category expenditure. Building on previous research that has focused on a limited number of categories, this research attempts to produce more general results by using IRI data from 1991 and 1992 to estimate category-level expenditure equations for private label and branded products across 135 food product categories and 59 geographic markets. The results support the premise that national brand and private label promotion can have a significant effect on the level of category expenditure. Furthermore, the results suggest that there can be significant differences across markets and across categories.