Strategic supermarket pricing of private labels and manufacturer brands

Large, low-cost entrants can have a disrupting impact on incumbents. Supercenters may influence competing supermarkets’ prices, but their effects on competition between supermarkets’ private labels and manufacturer brands remain poorly understood. This study examines the impact of Wal-Mart Supercenters on supermarkets’ strategic use of private labels and the control they may exercise over the pricing of manufacturer brands. We use a structural model to investigate alternative pricing scenarios in which the supermarkets have varying control over manufacturer-brand retail prices. The analysis is applied to the milk market in the Dallas/Fort Worth metroplex in an early period of Supercenter growth: 1996–2001. We find that Wal-Mart induces supermarkets to price their private label more competitively and has a very small effect on the pricing of the manufacturer brand. We also identify the type of consumers Wal-Mart Supercenters can attract from supermarkets, leaving incumbents to face a different composition of consumers. Consumers that continue shopping at traditional supermarkets are found to be less price-sensitive, view incumbents as less heterogeneous, and experience the manufacturer brand as more differentiated from private labels.