Equilibrium and Welfare Implications of Store Brands in Vertical Markets

Abstract

Retailers act as intermediaries between manufacturers and consumers. When retailers sell their own products alongside those of manufacturers, what is the effect on competition? Further, how does this effect hinge on market power? In this paper, I theoretically and empirically study the effect of store brands on equilibrium outcomes and welfare. I demonstrate the ambiguous theoretical predictions of how store brands can impact equilibrium outcomes using a simplified model, motivating two related empirical exercises that assess the implications of store brands in the U.S. yogurt market. First, I use an event study framework to show that after a store brand introduction, both the number and prices of retailer national brand products increase. Second, I develop a structural model of upstream vertical interaction between manufacturers and retailers, incorporating the strategic use of store brands and downstream consumer demand for differentiated products. I fit the model to observed pricing and quantity data to recover underlying consumer preference parameters and marginal costs. I then conduct counterfactual simulations that remove retailer store brands to show that the benefit of store brands to retailers and consumers, and the harm to manufacturers, is magnified under increased upstream market concentration.