R&D and advertising expenditures. The intuition is that it is vital for manufacturers willing to remain
sellers of branded products to keep brand loyalty of their brands at a level higher than retailer’ s store
loyalty. And the only way to pursue this goal and avoid to be involved into the risk of being delisted is
to boost brands. We also show that vertical competitive pressures are particularly strong on second- tier
brands. A brief review of some recent patterns and stylised facts in the food industries and grocery
channels consistent with these predictions conclude the paper.
Keywords: vertical competition, store brands, delisting, optimal advertising
1. Introduction
Large- scale retailing changes profoundly the relationships between manufacturers and
retailers. In particular, the existence of private labels (or store brands) adds a new and
important dimension to competition. Whenever in a category product, retailers launch
their private labels, the competitive environment is characterized by the existence of
vertical competition, namely the competition between retailers’ private brands and
manufacturers’ brands. This competition has become increasingly relevant in several
industries, particularly in the grocery and food industries. As a consequence, the
phenomenon of private labels has received significant attention in the recent
literatures of marketing, economics and strategic management. 1
The literature on private labels has addressed several issues. Most studies have
examined why retailers introduce private labels and their impact on the intensity of
retail price competition (Cotterill and Putsis, 2000; Gabrielsen and S0rgard, 2000; Hoch
and Banjeri, 1993; Mills, 1995, 1999; Narashiman and Wilcox, 1998; Bontems, Monier-
Dilhan and Réquillart, 1999; Putsis, 1997; Putsis and Cotterill, 1999), their strategic
positioning and market success (Sayman et al. 2002; Scott- Morton and Zettelmeyer
2001; Raju et al. 1995; Dhar and Hoch 1997), the consequences of store brands on
retailer profitability (Ailawadi and Harlam 2002, Kadiyali et al. 2000).
There is also a growing literature addressing bargaining power between manufacturers
and retailers in general and how, in particular, store brands contribute to increase
buyer power and enable the retailer to get input price concessions (Katz, 1989; Vickers
and Waterson, 1991; Berto Villas- Boas, 2002; Mills, 1995; Bomtems, Monier and
Réquillart,1999; Chintagunta et al., 2002).
Despite the growing literature, the presence and development of store brands raise,
however, some issues which remain relatively underexplored. One topic area which is
still particularly underresearched regards the effect of the competitive interaction
between private labels and national brands on the upstream incentives to adopt non-
price strategies such as product innovation as well as horizontal and vertical product
differentiation.
As a result, the issue remains characterized by different and conflicting views both at
theoretical and empirical level. Some views emphasize the positive impact of private
labels and buyer power for innovation and product quality. By contrast, other authors
propend for less optimistic views. As suggested by Mills (1999), brand manufacturers
can develop different counterstrategies in response to the development of private
labels. Some of these strategies refer to short- term decisions (for example, price
1 For a recent survey of the literature regarding the impact of private labels
introduction and expansion, see Bergès- Sennou, Bontems and Réquillart (2004).