Brand Competition in CPG Industries: Sustaining Large Local Advantages with Little Product Differentiation

Abstract

In direct competition between national brands of consumer packaged goods (CPG), one often has a large local share advantage over the other despite that the products are similar. I present an explanation for these large and persistent advantages in the context of local competition on perceived quality or image. The main result of the analysis is a relation between varying degrees of horizontal product differentiation and local share advantages. Namely, I find that local share advantages can be sustained especially if competing brands are objectively similar. Conversely, local share advantages can not be sustained if brands are dissimilar. This paper provides two independent intuitions for this result. First, if brands are objectively similar, different levels of investments in local quality perceptions can co-exist in the same market. Specifically, if it pays to do so, early movers will invest in high perceived quality. Late movers have reduced incentives to invest because of subsequent demand sharing and price competition. Second, if the perceived quality advantages are geographically distributed across competitors, the above argument is reinforced by multimarket contact. Even if local brand building is free, firms have an incentive to sustain asymmetric market shares because, holding total demand constant, multimarket profits are increasing in share variation, i.e., monopoly power, across regions. This increase is steeper when the products are similar, because price competition looms large.