National Brands versus Private Labels: An Empirical Study of Competition, Advertising and Collusion

This paper considers certain aspects of competition between national brands and quality-equivalent private-label brands (a form of store or own-label branding). The authors investigate the impact of advertising on the ability of brands to increase market power using a model of Cournot competition. Supporting recent theoretical arguments (though contradicting others), the authors' industry study reveals that heavy advertising among national brands can increase prices, revenues and profits for both national brands and private-label brands. In particular, the authors find that all players can peacefully co-exist: national brands collude with private-label brands. This holds despite price dispersion across brands, with private-label brands being sold at lower prices. Model outcomes are quantitatively validated by cross-competitor correlations, which reveal perfectly synchronised pricing strategies, and qualitatively validated by industry interviews.