Switching Costs and Market Power Under Umbrella Branding

Abstract

This paper extends recent research on the importance of switching cost for dynamic pricing to the area of umbrella branding and multi-product firms. We examine household level scanner data from the category of yogurt, focusing on parent brands that offer multiple sub-brands (e.g. Yoplait offers Yoplait Original, Yoplait Light and Yoplait Thick and Creamy). Our demand framework allows us to estimate state dependence arising from both the parent brand and the sub-brand level and in turn, to set up a dynamic pricing game in which we evaluate the impact of parent brand state dependence on forward looking prices and profits. Additionally, we use the dynamic pricing model to study two strategic issues pertaining to pricing: i) the benefit of centralized decision making (multi-product pricing) and ii) the potential loss associated with setting uniform prices across sub-brands of the same parent brand. Findings for the market leader in this category, Yoplait, can be summarized as follows: parent brand state dependence effects increase its profits by about 8%, centralized decision making generates only 0.1% incremental profits and this number is mediated by cross-sub-brand dynamics, and finally, uniform pricing across three sub-brands would cost only a small fraction of profits for the parent firm.