The Impact of Store Brands on Intangible Aspects of Consumer Welfare

Abstract

This research investigated how an intangible component of consumer welfare can derive from the presence of store brands in durable-product categories. The objective was to explore the degree to which consumers can more reliably depend on price as an accurate indicator of quality in those product categories in which store brands are present. When a strong price-quality relationship exists, consumers may confidently choose a given level of quality chiefly on the basis of price. The focal measure was the correlation between price and quality, computed separately for those categories in which only national brands were present and for those categories in which both store brands and national brands were present. Examination of the price and quality of 14,234 individual brands from the U.S. and other countries tested by Consumer Reports revealed that when store brands were present the strength of the relationship between price and quality exceeded the strength of the respective relationship when store brands were absent. Counterfactual simulations confirmed the relationship.

Keywords:

• Consumer welfare
• price
• private label
• quality
• store brands

Notes

1 A good summary of recent developments in SBs is provided by Tran et al. (2020).

2 A comprehensive summary of the motivations of retailers and manufacturers with respect to the introduction of SBs, as well as a good explanation of horizontal and vertical competition in distribution channels, is provided by Wu, Yang, and Wu (2021).

3 In some cases, lower-tier NBs may be withdrawn from the market, reducing variety (Fornari, Grandi, and Fornari 2011).

4 For a perspective on intangible costs, see Fuduric et al. (2022); also, Bronnenberg, Dubé, and Sanders (2020).

5 Broadly speaking, an efficient market is one having an absence of (or at least not many) inefficient brands; an inefficient brand is one that offers either lower quality than another brand at the same price, or the same quality as another brand but at a higher price (Kamakura, Ratchford, and Agrawal 1988).

6 A good review of use of such data is provided by Olbrich and Jansen (2014).