intuition is that the margin depressing impact of non- price strategies, as well as their
impact on retail penetration and support are additional to their direct demand-
creating effect. These ‘dual- stage effects’ increase advertising effectiveness leading to
higher advertising (and R&D) expenditures.
3.2 Vertical competition and delisting decisions
The Steiner effect is an important result of Steiner’ s two- stage analysis. It provides a
crucial building block for our framework. However, as we show in this section, it
understates the true effectiveness of advertising and R&D expenditure in a context of
vertical competition. In fact, a drawback of the Steiner model is that it neglects the
implications of retailers’ delisting decisions. Steiner considers the impact of store
brands exclusively as a determinant of retailer’ s bargaining power. As a consequences,
his approach is unable to take account of the full impact of vertical competition on
upstream non- price strategies. 10
In what follows, we investigate the impact of delisting decisions on the optimal A/S
ratio. We show that vertical competition with delisting implies an even higher optimal
advertising intensity then that predicted by the Steiner effect.
Before exploring this aspect, we focus on the nature of delisting decisions. Retailers’s
delisting decisions are a new phenomenon of increasing relevance. According to Prime
Consulting Group (2001) delisting is defined as “the removal or discontinuation of a
product from stores and warehouses as a retailer originated decision strictly related to
the introduction of private labels” (p. 4). In a competitive environment where private
labels conquer significant market shares shelf space allocated to store brands has
clearly to increase. This means that, analytically, one cannot neglect the fact that shelf
space is a scarce resource. To make room for their brands retailers have to decide to
delist some manufacturer brands. Whenever a retailer decide to introduce a store
brand, it needs to decide which national brand to take off the shelf in favor of the
store brand. The consequence is that competition for retailer’ s shelf becomes much
more intense. For this reason, in today’ s retailing environment, brand delistings is a
common practice. Due to the growth of private labels, the shelf- space allocated to
private labels is reaching vast dimensions. 11
10 In this regard, it is interesting to note that Steiner uses a definition of vertical
competition which is different from the notion we adopt here. He refers to vertical
competition exclusively in terms of bargaining power. By ‘vertical competition’, we
mean a more focused notion defined as the competition between manufacturers and
retailers brands.
11 There is evidence that, in recent years, retailers have been readjusting their
assortments delisting manufacturer brands as the market share of store brands
increased. For example, Euromonitor signal that in 2003 Rewe, Austria’ s largest
grocery retailer, to strengthen its private label sales increased the shelf space for its
private label range. To do that Rewe streamlined its pet food portfolio, delisting a
number of branded products (www.euromonitor.com/pet Food and Pet Care products
in Austria). PLMA revealed that Auchan's hypermarket division has sent a letter to
manufacturers confirming that it will greatly reduce the number of branded products
in its stores next year. Auchan said the large reduction of brands in its stores is the
12