contributes to increase the incentives of upstream firms to reinforce innovation and
differentiation strategies. The incentives to innovate and differentiate do not depend
only on the margin depressing mechanism explored by Steiner (the Steiner effect) but
also on the competitive reaction to the risk of being delisted (delisting effect). As a
consequence of this risk, manufacturers face even stronger incentives to adopt non-
price strategies of innovation and differentiation in comparison to those predicted by
Steiner’ s analysis. This further mechanism is due to the fact that retailers need shelf
space for stocking their private labels and they have to delist some manufacturer
brands to obtain it given that shelf space is a scarce resource. The competition for
retailer’ s shelf becomes much more intense.
This mechanism of delisting creates a threshold effect which increases optimal R&D
and advertising expenditures. The intuition is that the incentives to innovate and
differentiate are not only due to Steiner’ s effect but also to the threhold effect
associated to the level of store loyalty.
We show that vertical competition may have positive effects on the incentives to adopt
non- price strategies. With asymmetric firms (brands), an increase in intensity of
vertical competition does not necessarily lead to higher or lower profits for all firms,
but forces the firms willing to remain sellers of branded products to keep brand
loyalty of their brands at a level higher than retailer’ 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.
One further prediction of our framework is that retailers will be more likely to replace
second- tier brands with private labels because retailers can and are strongly
incentived to delist just secondary brands given that they obtain on these brands
lower margin than on tertiary- tier or fringe brands.
We also show that the delisting effect becomes stronger over time to the extent that
retailers develop stronger and stronger store brands. To the extent that consolidation,
reputation, and store loyalty of retailers tend to increase, the level of brand loyalty
which firms are forced to reach to avoid delisting increases as well. Thus, the
interaction between the mechanism of delisting and the evolution of private labels
determines a dynamic process which may finally involve even the strongest
manufacturer brands. Finally, the risk of being delisted and replaced by private labels
may become a real threat for market leaders themselves.
The rest of the paper is organized as follows. Section 2 gives a brief review of the
relevant literature on store brands and vertical competition. Section 3 sets up the
conceptual framework. In Section 4, we present some empirical evidence supporting
our framework’ s predictions. Section 5 concludes.
2. Store brands and vertical competition: background and stylized facts
Store brands have received increased attention in recent years. Two key stylized facts
are well- known and are increasingly confirmed by recent patterns. First, private label
products are steadily increasing their market share and retailers are placing a growing
emphasis on branding and marketing their private labels (Senauer and Venturini,
2005). These brands are the share leaders in several food product categories both in
the United States and Europe. According to the 2005 report from ACNielsen (The