Positioning of Store Brand HBR

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Positioning of Store BrandsSerdar Sayman Stephen J. Hoch Jagm ohan S. RajuCollege of Adm inistrative Sciences, Kog University, Rum eli feneri Yolii, Sariyer, Istmibul 8091 0, Turkey

The Wharton School, University of Pennsylvania, Suite 1400, Steinberg Hall-Dietrich Hall,Philadelphia, Pennsylvania 19104-6371

The Wharton School, University of Pennsylvania, Suite 1400, Steinberg Hall-Dietrich Hall,Philadelphia, Pennsylvania 19104-6371

ssa\iman@ ku.edu.tr hochs@ ivlmrton.upenn .edu rajiij@w harton.upen n.edu

e examine the retailer's store brand positioning problem. Our game-tbeoretic modelhelps us identify a set of conditions under wbicb tbe optimal strategy for the retail-er is to position tbe store brand as close as possible to tbe stronger national brand. In threeempirical studies, we examined wbether market data are consistent witb some of tbe im-plications of our model. In the first study, using observational data from two US supermar-ket chains, we found that store brands are more likely to target stronger national brands.Ou r second stud y estimated cross-price effects in 19 pro du ct categories, and found tbat on-ly in categories with bigb-quality store brands, store brand and the leading national brandcompete more intensely witb eacb other than witb tbe secondary national brand. In a tbirdproduct perception study, we found tbat althougb explicit targeting by store brands influ-enced consumer perceptions of pbysical similarity, it bad no influence on consumers' per-ceptions of overall or product quality similarity. Wbile it appears tbat retailers do followa positioning strategy consistent with our model, it changes buying bebavior in tbe in-tended fasbion only if tbe store brand offers quality comparable to tbe leading nationalbrands.{Store Brands; Private Labels; Positioning; Retailing; Game Theory; Competition

1. Po sition ing of Store BrandsStore brands or private labels are created and con-trolled by retailers. In aggregate tbey constituteabout 20% of unit sales and are among tbe top tbreebrands in 70% of supermarket product categories(IRI 1998). Although ignored in tbe past, recent re -searcb bas improved our understanding of howstore brands compete with national brands (e.g.,Cotterill et al. 2000, Hocb 1996, Kadiyali et al. 1998,Sudhir 2000). We study store brand (SB) and nation-al brand (NB) competition by considering tbe posi-tioning strategy of SBs. As is true for any brand.

positioning of tbe SB can exert an important inence on its performance. Unlike manufacturersNBs, bowever, tbe downstream retailer bas a difent objective function. Whereas NB manufacturposition their products to maximize profits frtbeir own products, the retailer focuses on maximing profits from th e entire product category, incling profits from the SB and NBs Hocb and Lod1998). We model how the retailer sbould posittbe SB to maximize category profits witbin tbe ctext of a category witb two NBs, one of whicbstronger. Positioning is operationalized as tbe

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POSITIONINGOFSTORE BRANDS

ceptual distance between twobrands, w here brandspositioned closer to each other exhibit a highercross-price sensitivity. We focus on understandingthe conditions under which the SB should targeta specific NB,either the leading brand (NBl) ora secondary brand (NB2), or follow an in-the-middle positioning and compete to a lesser degreewith both NBs. Although we take the retailer'sper-spective in this paper, a better understanding of SBpositioning strategy also is important to NBmanu-facturers, who must coexist with SBs.Schmalensee (1978) noted that SBs often imitatethe category leader, presumably to signal compara-

ble quality at a lower price. Although the demandfor the SB may increase, the potential downsideofthis strategy is that the demand for the targetedleading NB may also decrease. Since the retaileralso makes money by selling the NBs, it may notbe optimal to have the SB specifically com peteagainst the NBwith the largest customer baseandhigher margins (Corstjens and Lai 2000). Insteadoftargeting a NB that generates substantial profit,adopting a midpoint position where the SB com-petes to a lesser extent with both NBsmay bebetter.Yet, we often observe retailers targeting leadingNBs. Theanswer to this puzzle lies in a betterun-derstanding of the retailer's objectives and usingthis understanding to identify the conditions underwhich the retailer is better off targeting theleading NB.

The product positioning literature usually ignoresthe retailer. We are aware of only one study in-corporating the differences in the objectives of theretailer and the NBman ufacturers into theposition-ing problem. Tyagi and Raju (1998) examine thepreemptive positioning strategies of NBs whenthere is an NBversus an SBentrant. Wefocus onthe SB s positioning problem and attempt to findthe optimal location in both the symmetric case,where both NBs are equally strong, and the asym-metric case, where one NB is stronger than the

Weadopt a game-theoretic approach and ex- a market with two incumbent NBs and an

SB positioning essentially involves the approp riate perceptual distance be-

tween the SB and the NBs. This distance in turndetermines the cross-price sensitivity between theSBand each of the NBs. As such, positioning theSB closer to one NBresults in a higher cross-pricesensitivity between the two.

Our results reveal that SB targetingof the leadingNB leads to: (a) lower who lesale prices from bothNB l and to a lesser extent NB2;(b) higher marginsfor the retailer on NBs; (c) highe r profits from theSB; and (d) increased category demandall ofwhich can add up to increased category profit rela-tive to other positioning strategies. Furthermore,wefind that this targeting strategy is relatively inoreprofitable in categories where the leading NB isstronger. Intuitively, targeting the leading NB is an-other way to minimize the double marginalizationproblem. Since double marginalization islikely to begreatestfor the leading NB,andbecause theretailergenerally offers only one SB, targeting the lead-ing NB is the best strategy for the retailerundera reasonableset of assumptions.^ Onecanargue thatin other instances, such as when there existsaprice-sensitive segmentin themarket, it may bebetternotto target the leading NBandinstead to use theSBtotarget this segment.

In three empirical studies, we find that marketand perceptual data are consistent with some of theimplicationsof our analysis. In a field study in twoU.S. supermarket chains,wegathered observationaldata (labeling, package design and color, shelf place-ment, etc.) regarding the targeting strategies of SBsin various categories. We found that if the SB fol-lows a targeting strategy, thecategory leader inv ari-ably is the target. Furthermore, consistent with thepredictions of ourmodel,theprobab ilityof aNBbe-ing targeted by the SB is an increasing function ofits market share relative tothatof itscom petitors.Ina second study we used store-level da ta fromA.C.Nielsen toexamine dem and-price relationships in 19categories and estimate cross-price effects to assessinterbrand competition. When we use el sticityasthe price-effect measure, cross-price elasticities doWe thank the former editor, Brian Ratchford, for suggesting tbisintuition.


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SAYMAN, HOCH , AND RAJUPositioningofStore Brands

sugge st that the SB and NBl conipete m ore intenselywith each other than with NB2 in categories withhigh quality SBs but not in categories whereSBquality is low (Bronnenberg and Wathieu 1996).W h e n absolute cross-price effectsare used , est imatedprice effects areconsistent with the implicationsofour analysisin both high and low quality SB catego-ries. Tn a third study of product perceptions,wefound that consumers could detect when SBs tar-geted a NB; consumers rated thephysical similarityof theSB and theNB to bemuch higher wh en thetargeting was explicit rather than ambiguous. How-ever, explicit targetinghad noinfluence onconsum-ers perceptions of the overall similarity or productquality similarityof the SB andNBl.In fact, the SBwas rated as more similar to the lower share NBs(NB2 and NB3). While it app ears that retailersdofollow a positioning strategy consistent with ourmodel, it by and large changes buying behaviorinthe intended fashion only in cases where theSBof-fers quality comparabletothe leading NBs.

are thesame, all consumers prefer thebrand whigher quality. Competition between aSB and a is mo re like com petition betwe en vertically differtiated brands.Our positioning problem requires simultanemodeling of the competition amon g NBs, andcompetition between aSB andNBs.Theproblemfurther complicated by the fact that thecom petitparties resideat two different levels of thedistrition channel, with each party maximizingitsresptive profits. Consequently, we utilize areducedapproach, where heterogeneity in tastes and difences among brands are captured throughaparsim

nious demand model grounded inutility theory.

2 1 Demand Structure Without the Store BrandThe demand forNB(, denoted byq / = 1, 2, issumedto be asfollows:

2. The ModelWe consider a market consisting of twoNB manu-facturers, each offering one NB sold throughacom-mon retailer. Theretailer can introduce a SB if itresultsin higher total category profitsfor the retailer.Our model extends previous work by Raju et al.(1995) by allowing the retailer also to decidehowthe SBispositioned relative to the twoNBs. Previ-ous studiesof brand competition,by and large,ac-count for heterogeneity in consumer preferencesusing two distinct modeling approaches:(1) Models such as DEFENDER (Hauser andShugan 1983)al low for horizontal differentiation.Nobrand isuniformly b etter than the other bran ds; dif-ferences in tastes lead consumers to buy differentbrands. Competition among horizontally differenti-ated NBsisoften mo deled byallowing for differentconsumer ideal points in a Hotelling-type frame-work (Hotelling 1929).

(2) Moorthy (1985) studies differences among ver-ticallydifferenti ted brands. In this context, if prices

where ^J,is thepriceof NB/,fl, 0, 1) is theblevelof demand ofNB/,and 0 e 0, 1) is thecroprice sensitivity representing the degree of pcompetition between the two NBs. The proposedear demand function isconsistent with utility m amizing consumers with quadratic utility functi(Shubik and Levitan 1980). Althougha different uity function could lead toanother d emand structuand there is conflicting evidence rega rding theof linear demand to market data (e.g., Bolton 19Cotterill and Putsis 2001), we employ the abstructure for analytical tractability aswellascontency with previous research (Rajuetal. 1995).

The demand structure in 1) and 2) generalthe demand model used inRaju etal. (1995)as ilows the base levelofdemand of thetwo NBstdifferent. Overall category demand equals 1 wpi P2 0,implying that thereis abound onmuch consumers will buy. We also assume that


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SAYMAN, HOCH, AND RAJUPositioning of Store Brands

, prices are additional to marginal cost.

Dem and Structure wi th the Store Brand addition to the two NBs, we now include the SB

1

1X j I2 ~ P2 + 2

1

3

{4}

5 a^ e (0, 1) is the

petes w ith NB/. The 6,s are affected by the posi-l category dem and equals 1 when P\ = pz = Ps= 0. However, in equilibrium the introduction of

o SB case.Note that (3)-(5) have two price difference termsand (2) contain only one price difference

To keep the model tractable, we use the same pa-eter 6, in (3) as well as (5), and 62 in (4) as well (5), implying that cross-price sensitivities are sym-NBl and the SB has the same effect on N Bl

demand as it has on SB demand. This is consistentwith the findings in Sethuraman et al. (1999), wherecross-price effects, when measured in absoluteterms, are by and large equal. We are not, however,assuming that the cross-price elasticities are symmet-ric, because elasticities also depend on the demandsand shares of the corresponding brands. Linear de-mand imposes a particular structure on the effect ofchanges in wholesale prices on retail prices, as notedin Tyagi (1999). We ackn owle dge that othe r functionalforms may lead to different outcomes but leave this tofuture research.

2.3. M ode ling the Store Brand Position ingDecisionRecall that the parameters 5] and 62 in (3)-(5) cap-ture the extent to which the SB com petes with thetwo NBs. In our framework, positioning correspondsto choosing ] and 62 so as to maximize the re tailer scategory profits. The param eters 6] and 62 are dete r-mined by the perceptual distance between the SBand the two NBs, respectively. For example, if theSB is positioned right next to NBl, then 61 = 1 and62 = 0- Note that although S2 = 0, correspondingprice elasticities betwee n NB2 - NBl and NB2 - SBare not equal.In order to formally model the positioning deci-sion, we assume that brands are located in an n-dimensional perceptual space. Letf d) map the dis-tance between the two brands into cross-price sensi-tivity. We assume that f{d) has the followingcharacteristics:1)f d) should be a nonincreasing function of d.This property implies that as the distance betweenthe two brands increases, the cross-price sensitivitydecreases. That is,d is inversely related to the 6, s.2) As d tends to ^ , f d) should approach 0. Thisproperty implies that if the two brands are posi-tioned very far apart, they do not compete with oneanother. 3) As d tends to 0,f d) should approach 1. This

pu ts an upp er bo un d on 8,. Recall that the u pp erbound on 8 is also 1.


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4) The same changeinr should leadloa greaterchange infid whenrf is small. This propertyas-sumes that a unit cbange in tbe SB sposition willbave a greater impact on cross-price sensitivitywben the SB iscloser to aNB than whenit isfartheraway. For example, imagine a product category char-acterized by a single perceptual dimension, anda brand islocated at tbeorigin. It seems reasonableto expect tbat a move by a second brand from 5units of distance away to 4unitsof distance wouldbave a smaller impact on price com petition tbana move from 2units away to1 unit.In addition tothese four prope rties,if we restrict

f{d) to be monotonic and continuous, then f{d) isa strictly convex function ofd.Tbeassumption thatf{d) is convex is easy to justify in situations wherethe NBsare positioned around clustersof consumerideal points. LeeandStaelin (2000) show tbatf d)isconvex, even wben ideal points aredistributeduni-formly.^2.4. Effectof Store Brand Positioningon the Marginal Costofthe Store BrandThe marginal costoftbe SB canbeaffected by its in-trinsic quality (tbe ingredients) andalsobypackag-ing, labeling, and the like. While these differencesare important, wecombine tbe twointo one mar-ginal cost parameter in our model. Recall thattbemarginal costof the NBs equals zero. For parsimony,we first assume tbat tbe marginal cost of tbe SBalso equals zero and does not depend onpositioning.Then we assume that tbecost to the retailer equalszero wben tbe SB targetsaNB, bu t the SB basacostadvantage wben it is positioned in tbe middle.More specifically, weassume that the marginal costof the SB equals /:,when positioned intbe m iddle.We also study acase wberethe costof targeting de-pends on whicb NB isbeing targeted for thecaseof asymmetric NBs.^Assum e _fl|J) islinearin J e (0,^) .In this case theslopeoi f d)has to be negative and finite tosatisfy the above cond itions. Thenithas to intersect with thed axis. Similarly- any strictly concavefunction has to intersect with thed axis, given theabove condi-tions. Only a strictly convex function cansatisfy the four condi-tions above.

2.5. Some Limitationsof Our Model FormulatioWe assume that positioning affects cross-price sentivity but not base levelof demand. One could argthatas tbeSBis positioned closer to anNB,itsblevel of demand might increase because tbe Nprobably are positioned closer to consumer idpoints.On tbe other band . eeand Staelin (20pointouttbat tbebase levelofdemand may indecrease in tbese circumstances. A more genemodel should allow forcbanges in 6i and 62,aswas forchanges in base salesas aconsequenceofsitioning decisions,but weassum e tbat positionaffects only cross-price sensitivity and nototheratributes such as quality. Tbis is a limitation of omodel,but by focusing solely on theeffect of potioning on cross-price sensitivity we get a clealookat tbe resultant effects of wholesale prices,dmands,andprofits.

Our model ignores store competition. Store copetition may lower marginson leading NBs as stoprice tbese brands competitively to attract nesboppers. Hence, tbe addition al mileage that a rtailer may gain bypositioning tbe SB optimally mbe lessasretailer margins dropdue tostore comtition.On theotber b and , store com petition has potential toincreasetbepowerof NB manufacturvis-a-vis a particular retailer. Therefore, the imptanceofSB positioning as a means todisciplinetNB manufacturer may increase wben one takes account store competition. Tbese as well as mother important consequences of store conipetiton SBposition ing decisions (sucb as precipitata price war witb tbe national brand s) are not counted for inour model.

2.6. SequenceofDecisionsTbe assumed sequenceofdecisionsis asfollows:Stage 1.Tberetailer positions tbe store brandand 2 are determ ined).S^^t' 2. National brand manufacturers cbotheir respective wholesale prices lu ^and1 2 tommize tbeir respective profits.Stage3.Theretailer chooses retail price s pi,and psto maximize category profits.


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We assume that NB positions are fixed. AlthoughNBs may prefer to reposition, it does not happen of-ten even over the long run (Halstead and Ward1995). We also do not account for the effect of othermarketing variables such as advertising or personalselling.

3. TheAnalysisThe analysis consists of two parts. First, we considerthe symmetric NB s case where base levels of de-mand for NBl and NB2 are equal but higher thanthe base level of demand of the SB, i.e., ] = 2 =I > Os> a* > 0. Because we only consider caseswhere introduction of the SB is ex ante profitable(Raju et al. 1995), base-level demand of the SB ishigher than a nonzero cut-off, a . Consideration ofthe symmetric NB s case provides insight into whypositioning strategy is different when adopting a re-tailer versus manufacturer perspective. In the secondpart of our analysis, we examine the asymmetricNB s case where one of the NBs is stronger than theother, specifically, flj > a2 ,a^.

3.1. Symmetric National Brands{a i az= 1 > a, > H* > O)

To focus only on demand side issues, we first beginby analyzing a scenario where the marginal cost ofthe SB to the retailer is zero and does not depend onthe positioning strategy, /:, = 0.

LEMMA 1.The ot tima SBposition lieson theline seg-ment connecting the two NBs.

Let n denote the retailer s profit. We show in theAppendix that ^n./BS, > 0 and an. /aSj > 0. Anypoint not on the line segment joining the two NBs isdominated because by moving to the line segmentwe can increase at least one of the 6,s without reduc-ing the other. Lemma 1 has important, nonobviousimplications. Although it is commonly believed thatone should position a brand to minimize competi-An abridged appendix at the end of the paper contains brief

sketchesof theproofs.A full technical appendix islocated on theMarketing Science website http://inktsci.pubs.informs.org).

tion, it does not hold when we are talking about theretailer. Because retailer profits increase with 6i and62, the retailer benefits by positioning the SB so as toincrease competition with the NBs. More competi-tion at the retail level lowers NB powerwhich isgood for the retailer. This basic intuition can alsohelp us further understand the precise positioningstrategy of the SB.

PROPOStTiON 1.For thecase where ba se demand of thetw oNBs areequalbut higher than that of the SB fo, =t72 = 1 > fls > ; > 0), it isoptimalfor the SB lo targeeitherone of the NBs rather than to bepositioned else-whereon the line segment joining the two NBs, as longasf d) isreasonably convex.

The intuition is as follows. Retailer s profits in-crease as the 6/S increase. However, from Lemma 1,the optimal position is on the line segment joiningthe two NBs. If we tnove the SB on that line seg-ment, 5i and 82 cannot increase simultaneously.Therefore, the optimal positioning essentially boilsdown to determining what is the best combinationof 6] and 82. Since n, is symmetric with respect to 6,and 82, the solution is either targeting or midpointpositioning. Asf{d) is convex, it is best to increaseone of the 5/S to the maximum and the other to itslowest level by targeting one of the NBs. It may beworthwhile to note that Raju et al. (1995) also pointout that a higher 6 increases the retailer s incentiveto introduce a SB. However, in that paper, 6 is deter-mined exogenously. In the current paper, 6 is endog-enous and depends on SB positioning.

Note that Proposition 1 depends on the convexityof the distance function. If f{d)is linear, the optimalposition is in the middlewhich corresponds to 5i= 2 = {1 + 9)/2. It is worthwhile noting that onlya small degree of convexity is sufficient for Proposi-tion 1 to hold. Furthermore, the optimal positioningof the SB is not a continuous function of the convex-ity oi f(d). As soon as the convexity of f{ii) increasesbeyond a critical level, and this critical level is notthat high, it is optimal for the SB to target a singleNB rather than position anywhere else on the linesegment.


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The retailand wholesale pricesof both NBsde-crease with theintroduction of theSB,but the tar-geted NBexperiences a greater decrease. This isconsistent with Halstead and Ward (1995), whore-port thatthemost comm on responseof theNB stothe increasing SB threat is todecrease their prices.The introduction of the SBleads to increasedre-tailer margins on theNBs. * Furt he rm ore , thisin-crease is largeron thetargeted b rand . Theprofitsof both NBsdeclin e after SBentry, and the de-crease is larger for the targeted NB.Finally,theequilibrium category demand increases, and de-mand for both NBsdecreases with the introduc-tion of the SB because the overall categorydemand is relatively inelastic. However, the tar-geted NBdoes not lose as much demand as thenontargeted NBbecause of its lower equilibriumprice. Overall, targetinganNB resultsin theopti-mal levelof interbrand compe tition, which in turnleads tobetter terms of trade for theretailer,anda more desirable allocation of dem and acrossthethree brands that leads to highe r profits des pitea reductionin sales from the NBs.

We now allow for SB marginal costtodependonits positioning strategy. Recall that the marginal costof the NBsisassumed toequal0.To keepthenum-berofparametersto aminimum,wecapture costofpositioning by assuming that SBma rginal cost isequal to the marginal costof theNBs (i.e.,0)whenit targets a NB,but it is-k,,,when it is positionedinthemidd le. The m ain resultisreported inPropo-sition2.PROPOSITION 2.For thecase where demandof the two

NBs are equalbuthigher than base demandofth eSB, itis optimalfor the SB to target either oneof theNBs, aslong asf(d) issufficiently co nvex a nd k,,,issmall.

The maximum value of k,,, that can be toleratedbeforeitbecomes bettertopositioninthe m iddlein-creases as f{d) becomes more convex.

*When thebase level of demand of theSBis very low, the re-tailer's marginson the NBs do not increase.

3.2. Asym metric Nationa l Brands(ill > (32i 0

Analysis of the symmetric NB'scase results in thfollowing key insights: The optimal positionofthe SBis on the line sment joiningthe two NBs. As long as the distance function is reasonabconvex, and the cost of targeting a NB is beloa threshold,it isbest totargetone of theNBs.more convexthedistance function, thehigheris cost threshold.With symmetric NBs, targeting one is equivaleto targeting theother OnceweallowoneNBto

stronger than theother aswell as theSB(fli >afls), we can resolve the issueofwhetheritis bettetarget the strong or weak NB.Themain resultsummarized inProposition3.Note that comparisof profits from targeting NBlorNB2isindependeof the cost advantage of positioning at the mpoint.PROPOSITION3. //aj > az,a ^,the retailer s profit

higherif fheSBtargetsthe leadingNB than whenittgets the secondaryNB.

Table 1 summarizes the equilibrium expressiofor theasymm etric case with theSB targeting NBnote that Oiis set to 1,without lossofgen erality.understand the intuition,weexaminea specific cwhereo, > ^2 = ^s^ which leads to simpler exprsions than those inTable1.We show that targetithe stronger NBresults in lower total NBdemathan targeting the weaker NB. Furthermore, targetithe stronger NB resultsin a lower average wholesprice. These two effects combined resultin lower tal manufacturer profitsonNBs w hen the SB targNBlasopposed toNB2. Hence, targeting NBl leato greater profit pressureonnranufa cturers, allowithe retailer to capture someofwhat isgivenupthe ma nufacturers. T herefore,it isnot surprising twe find thattheretaile r's co mbined profits fromttwo NBsarehigher w hen the strong NBis targeas opposedto the weak NBas long asa >a .thermore, retailer profit from the SB is higher whentargets the strong NB as opposed to the weak NB.


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Table Equil ibriain Category wi th Asymmetr ic BrandsWithout the Store Brand WiththeStore Brand

NBl wholesale price {w\] 2+26+NB2 wholesale price iuA)NBl retail priceip]]NB2 retail price{p ,)SB retail price{p )NBl demand{ij\)

NB2 demanddj )SBdemand(;;')Retailer's profit(n ' n;}

4+ 88+36 ^2M .+ 0 +2oj94+86+39^ T 2+ 46T J l ' ^ 1 i i 1 D

2 +46( i +9)(2 +29+Hi6j( l + f l i ) ( 8 + 1 6 6+69')

(1 +6)(2z+9+2:9)( I +ai){S+ 169 + 69 ')q Ap - w ) +q*{pl - ,

2(4+4924+329+76^{ a +9+2326)

24+326 + 79^^ 6+2,?,+89 2 ( 8 ++46+4a,2+6(1,+26+8a,0+4^29+6^+ 0.6'2 ( 8 + 146+39')(3+e)(42( +o,+fl,)(24+329+76 ')2( 12(l+fl2+,? , ) 2(1 +2+,)(24+326+7 6 'I M ~ ^ + f l^P i ~ 'it + ^ P

Sofar, wehave assum ed that SB costis thesamewhether it targets NBl or NB2. This is consistentwith our basic assumption that the marginal produc-tion cost of NBsis equal. Yet, what happens if themarginal cost of SB is lower when it targetsNB2than when it targets NBl? Assume that theSB costdecreases to-kz


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rivea general analytic resultforthe asym metric casethat holds for all distance functions. Therefore,forthe asymmetric case, assuminganumberofdistancefunctions (e.g.,/{rf) - -exp{d , and f{d =1/ 1 +dsatisfying the conditions above),weconductednu-meric analysis, and in all cases, it turned out thattargeting NBl resultsinhigher profits than position-ing anywhere elseon the line segment joiningthetw o NBs.Even for the linear distance function,which correspondstothe limiting caseforconvexity,targeting NBl is optimal unless NB2 is sufficientlystrong. This implies that the convexity conditiononthe distance function weakens when the NBs areasymmetric.Our analysis shows that by positioning againstNBl retailers can reducethe monopoly powerof theleading brand and increase their ownrelativebar-gaining power seeBetancourt and Gautschi1998,Morton and Zettelmeyer 2000).Our results alsopo-tentially suggest another solution to the double mar-ginalization problem (e.g., Jeulandand Shugan 1983,Gerstner and Hess 1995, Ingene and Parry 1995), thisone initiated by the retailer. Minimizing the effectsof double marginalization could benefit the retailerin the long runbecause it leads to increased jointprofits, and a part of this increase can potentiallyflow to the retailer, depending on therelativebar-gaining power of theretailerand themanufacturer.Because the double marginalization problemislikelytobe most severeforNBl,by targeting NBl,the re-tailer lowersthe monopoly powerofthe NBl manu-facturer at thewholesale level while retain ing somemonopoly power over retail prices becauseitcansetretail prices of NBsaswellas theSB,all of whichare substitutes. Undera reasonableset ofcon ditions,the retailer gains significantly more profitbyexplic-itly targeting NBlcompared to moving only part-way towards NBl. These conditions include: i) Thedistance function is sufficiently convex (i.e., cross-price sensitivity drops off rather quickly as the SBmoves away fromanNB). (ii) Cost advantageofn ottargeting is not toohigh, tf these conditionsare notmet,orwh en the retailer is betteroffusing the SBtotargeta unique segmentof the market, one maynotobserve SB targetingtheleading NB. Furthermore,if

retail competition is so severe that do es not allothe retailer anymonopoly power over retail pricthe benefits of targeting the leading NB may materialize.

4. Empirical Stud iesIn this section we present three empirical studithat examine whether market and perceptual daare consistent with someof theimplicationsof oanalysis.4 1 Study 1: Observational Dataon Store Brand PositioningAkeyfinding in the theoretical analysis is thattSB should locate next to NBl if certain conditioare met(Proposition 2). One of these conditionsthatthe costoftargetingisnot beyo ndacriticallel. Becauseofdifferences in targeting costs,wemnot observe this strategy in all product categoriHowever, Proposition 4 suggests that allelse equthe relative profitability of targeting NBl is an icreasing function of asymmetry in NB strenghence, the probability that a SB targets the leadNB should behigher in categories where theleadis stronger.

4 1 1 Data and Methodology ntwo leading Ugrocery chains,twoobserve rs collected d ata regaring thepositioning strategies of theSBs.75categries were randomly selected from theMarketing ook (IRI 1998), ranging fromdrygroceryto frozrefrigerated foods andhealthandbeauty aids. Dwere eventually collected for 64 of these 75categries in onechain (StoreA) and for 56categoriesthe other (Store B). For the remaining categorithere wasno SB alternative available. SBsareeasidentified by their brand nam es. Observers evaatedtheavailable extrinsic cues ,andjudged thesitioning strategy of the SBproducts. The speciextrinsic dimensions used in the evaluation werepackage design; ii)labeling/color; iii)shelf plament; and iv)shelf talkers ( Com pare and Savsignage)if any. Prior research hasfound that co


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on et al. 1994). Each observer indepen-

of the time. When both observers ag-at the SB was trying to compete with aspecif-

NB, the brand name of the targeted product was

4 1 2 Results The SB followed a targeting strategy39 of the categories in Store A and 32 in Store

In the remaining categories, the SB either did notllow a targeting strategy or targeted multiple NBs.

t is not that easy for the SB to differentially tar-lar. In categories where SB targeting occurred,

Marketing Fact Book1998) 84of the time in Store A and B, consistent with

tion 2 where SBs target the category leader ifTo examine if market data are consistent withr Stores A and B using targeting strategy of the SB

0 = otherwise). The key independent variables

h e two observers were notaware of the market shares of the at the national level may differ from

in these twostores.It turns out that while we doto market shares for thesetwostores,thechains are parts of are included in the data used in

2. Wehave m arket share data for these chainsfor the mar-ofwhichthe twostoresare a part. We computed rankor-

at the chain-market area the national-level market shares. The correlation was

75. Hence, national-tevel shares track local shares quite closely.

mands. We identified the unit market shares of thetop two NBs in each category, MSi and MS2, fromtheMarketing Fact Book^.We also included two covriates, the number of NBs in the category ( NB)andCategory Size (M), to control for other possible ex-planations for SB targeting strategy. In the first logitmodel, we use MS as a predictor variable. How-ever, when there are more than two NBs, relativebase strength of the leading NB with respect to thesecondary KB may be a more realistic measure.MS1/MS2 is used as a predictor variable in thesecond model. MSi and MS1/MS2 are positivelycorrelated (+0.42 for Store A and +0.73 for Store B).

In the first model,MSy is the only significant vari-able for both Store A ((J = 7.99,p =0.012) and StoreB (p = 7.26, p = 0.016), and its effect is in the hy-pothesized direction (results are reported in the tech-nical appendix). In categories where the marketshare of the leading NB is higher, the probability ofobserving a SB that targets the leader increases. Theeffect ofMS1/MS2 is significant in the second modelfor Store A (p = 1.32, p - 0.006) and Store B (P =0.67, p = 0.054). When the leading NB is strongerrelative to the underdog, it is more likely to be a tar-get for the SB. The effect of the number of NBs andcategory size have little impact on SB positioning. Toallow for correlated errors across the two stores, wealso estimated a probit model for the 53 product cat-egories common to both stores. We allowed store in-tercepts and the p coefficients to be different for thetwo stores. The results were very similar to what wefound when estimating separate models for eachstore.

4 1 3 Discussion. Study 1 provides evidence thatif the SB follows a targeting strategy, the target is, in-deed, the leading NB. We also found that SB target-ing strategy depends on the (relative) market shareof the leading NB. A limitation of this first study isthat it considered only two grocery chains and maynot generalize to other retailers. While it seems thatretailer actions reported in Study 1 are consistentwith our model-based predictions, we cannot claimthat they are doing it for the same reasons that aresuggested in our model. In other words. Study 1 is


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SAYMAN, HOCH, AND RAJUPositiofiingo fStore ratids

Figure Examples ofCatego r ies w i th A mbiguo us and C lea r Ta rge t ing

mbiguous Targeting Clear NB Targetingnot a formal test of our model. The data in Study 1also provide no direct evidence on whether the tar-geting strategy has the intended influence on eitherconsumers' perceptions of the SBs or their huyingbehavior. A positioning strategy is a means for theretailer; whether or not the SB is successful in com-peting with the leading brand is still an empiricalquestion. The next two studies address these issues.

4.2. Study 2: Inferring Store Brand-N ationalBrand Competitive Relationships fromSecondary DataOur model predicts that under certain conditions, itis optimal for the SB to choose a position closer toNBl thereby resulting in greater competition be-tween N Bl and the SB than between NB2 and theSB or NBl and NB2.

4.2.1. Data and Methodology. We utilized syndi-cated sales data from A.C. Nielsen for 19 productcategories and 122 retailers operating in the top 50US markets. In each of the categories, a SB was soldby more than 50 of the retailers. For each retailer,the database includes brand-level information (unitsales, prices, and promotions) on a four-week basis

for each category over 30 periods (February 1through May 1995). As in Study 1, we assume smaller share brands have limited influence on SB strategy. To take into account the effects of oNBs, we combined them into an omnibus NB3.We assume that the SB positioning strategy istermined at the retailer level and not modified othe 30 four-week periods. Therefore, we identithe category leader {NBl), the secondary br(NB2), and other NBs (NB3) separately for eachtailer based on unit sales over the 30 periods. Hewhat we are measuring does not pertain to specNBs but to NBl and NB2 in each retailer. For eof the 19 catego ries, we estimated dem and functfor the SB, NBl, and NB2 using a linear speciftion/ Product demand is a function of the retail ces and sales promotions.

We use the following notation. Let / = 1, 2, anrefer to national brands, and s refer to the SBsubscript r 1, .. ., 122 refers to the 122 differenttailers in the data. Finally, the subscript t 1, .represents each of the four-week periods over whwe have the data. Our key measures are definext.^Results using a double-log specification produced similar res


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SAYMAN, HOCH, AND RAJUPositioning of Store Brands

Dem and for National rand i (Q,>,), We use

1 designates the leading NB based on the sales

De ma nd for the Store rand Qsrt)-Likewise, we In the 19 categories employed here, SBs are pres-

Retail Prices (P,>,, Psrt)-Retail prices are also

P^,,, is the weighted aver-

Promotional Intensities (S,>t, Ssn). We use the

Sj,, isfraction of other bra nds basket sold on deal.Indicator for Retailers (R^). We inclu ded thes e

it is worthwhile to keep in mind that prices and

the averages of promotional intensities from otherretailers (Cotterill et al. 2000, Nevo 2001).The empirical model we estimate is derived fromour theoretical model. The three demand equationsoutlined in (3)-(5) can be rewritten as follows;

1

+ 2 + 21

+ ai \ a^

2

9 622 ^ 2

(6)

(7)

(8)As such, we est imate the fol lowing models for

each of the 19 pro du ct categor ies:

(9)

(10)

(11)

aJSsH + a;Si, + aJSi. + aJSg,,,

alSsr +ajs,,, + a^Sz,,

-Hwhere Q, P. and S represent dem and , price, andavailability of sales promotions respectively. Retailerindicator variables capture the differences in baselevels of demand due to possible differences in con-sumer demographics, retail competition, etc. p| is theeffect of the price of Brand / on the demand ofBrand j . For example, ^\ represents the effect ofNBl's price on SB demand.

Equations {9)-(ll) are estimated separately, andthey designate the demands for the leading NB, the


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SAVMAN, HOCH , AND RAJUPositioningofStore Brands

secondary NB,and theSB. We estimated thecross-price effects using twoalternative specifications, lnthe first specification, demand and price terms arenormalized with respect to their averages withinrespective retailers (i.e., Q,rt/Qi^ and Pir,/P,r -He nce , PJ coefficients co rrespon d to price elasticities.In the second specification, bsolute price effects areestimated. Sethuraman et al. (1999) point out thelimitations of using elasticities as means to studyasymmetric competitive effects, and they suggestthat absolute effects should be examined as well.Eollowing theprocedu re used in Sethuraman et al.(1999), demand terms arereplaced with themarketsharesof each of the brand s. Therefore, the |3( coeffi-cients are the absolute cross-price effects.

Prior research (Bronnenberg and Wathieu 1996;Dhar and Hoch 1997) has shown that thequality ofthe SB is a key determinant of performance. There-fore, we a priori divided thecategories into h igh-quality (n = 10) and low-quality (/; 9) groupsusing data from Hoch and Banerji (1993).^ Our maininterest hereis thepJ terms (y = 1, 2, s, and / = 1, 2,3, s). To summarize theresults for the high and lowSB quality groups,wecombined the^\estimates foreach group of categories by we ightin g each coeffi-cient according to its precision (the inverse of itsstandard error squared).Inall, for both the elasticityand absolute effects specifications we obtainedatotalof twelve P s for the high and low quality SBgroups.Ourfocus is on the 6cross-price term s thatcharacterize theextent of price competition betweenNBl, NB2,and theSB. Recall that wh en theSB tar-getstheleading NB,it follows that 6i = 1 and 62 =9. Furthermore,0 is less than 1 and so61 > 62= GKeeping these in mind, Equations (6)-(U) suggestthe following inequality: {p;,^\] > (pl, p:, Pj, P;}.

4 2 2 Resu lts Rh from the elasticity andabsoluteeffects regression models provide little informationabout thegoodness of fit of the individual categoryHoch and Banerji s (1993) measure ofS quality isbased on asur-vey of retail experts (quality assurance managers) from 50 leadingchains and wholesalers.

level models becauseof the inclusion of theretaconstants. Toassess fit, we converted the (normized) demand andm arket sha re figuresestimafrom theelasticity and absolute effects mo dels, spectivelyinto unit sales. Average simple corrtions between the actualand estimated sales are 0and 0.98.

The estimated cross-price effects are compawith the main predictions of our model inTableWe compared p; and p; to pj, p*,, pf, andp^, andfor each of the high- and low-quality categgroups there are eight pairwise com parisons. Bneath the average coefficients, wealso report asmary of the same set of pairwise comparisons usthe individual category-level estimates. Specificawe report the percentage of individual categmodels where p and p, are greater than pJ, p^,and Pf. Anexam ination of the combined estimaindicates that all eight pairsof coefficients are sigicantly different from each other (p


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SAYMAN, HOCH, AND RAJUPositioningofStore rands

Table2 Average Estimated Cross-Price Effects inStudy2p;.

High-Quality CategoriesPrice elasticities

ofp; > pofp;> p-

Absolute price effects of p; > p , ofp', > p-,

Low-Quality CategoriesPrice elasticities

ofp; > p; ofp-;> p;

Absolute price effects o p,'> p; o p i> p;

0.241

0.197

0.011

0.073

0.237

0.152

0.467

0.129

0.08070800.0869090

0.08433890.0405577

0.14570900.08810090

0,22922890.0448989

0.193S9700.05810090

0.10133670.048077

0.20270500.0789090

0,15933770.0476767

The results for the categories with low-qua litySBs are less supportiveof our model ,atleastin thecase of price elasticities. An examination of theprice elasticitiesfor low quality show that pricesofboth NBshave a greater impact on SB demandthan vice versa. Moreover, theSB a ppea rs to com-pete more with NB2than with NBl. In contrast,the absolute price effects for the low-quality cate-goriesaremore consistent with ourSB positioningstory,asboth ^landp*,aregreater than p ,p^,pf,and Pj. Thedifferences in elasticity estimatesandestimates of abso lute effects have aiso been n otedin Sethuramanetal. 1999).To avoid potential econometric difficulties thatcould arise due toaggregating across heterogeneousretailers,wealso estimated mode lsat theindividual

retailer Due to sparse data (30 observations/retailaccount),weidentified the 5 largest multimarketre-tailers that operated in a minimum of 5 differentmarkets 30 periods x 5+markets = 150-F observa-tions/retailer). Weestimated the models in Equa-tions 9)- ll) separately for each retailer andincluded market-levei dummies. The results are sim-ilartothat reported above.4.2.3. Discussion. Overall, Study 2 offers somesupport for our model. In categories w ith high er-

quality SBs,itdoes appear that the SB and NBl com-pete with each otherto a greater extent than theydowith NB2. Suchisnot the caseforthe low-qua lity SBcategories when elasticity isused as themeasureofprice effects. These results are robust to the exacmodel specification. It doesnotmatter whetherweestimate the model aggregating acrossallretailersorat the individua l-retailer level. It does not matterwhetherwe estimate cross-price elasticitiesorabso-lute cross-price effects Sethuram an et al. 1999).Infact, our predictions also holdinlow-quality SB cate-goriesif absolute cross-price effects are considered.What might explain the difference betw een thehigh-and low-quality SB categories? One possibilityis that retailers pursue different positioning strate-gies, depending on thequality of the SBthat they

can procure. When they can buyaSB thatiscompa-rable to NBquality, they follow thepredictionsofour model and position against the leadingNBWhen SBquality canno t m atch that offered by thNBs, the retailer treats the SB as an inferior goodand positions it against the weaker NBs. Alterna-tively,let us assume thatthe retailer followsthe dictatesof our model irrespectiveofSB quality, alwayspositioning against the leading NB. The observed re-sultsfor low quality categories could also ariseiftheconsumer simply does not accept theposition that


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SAYMAN, HOCH, AND RAJUPositioningofStore rands

the retailer stakes out for their SB. In this caseconsumers may readily perceivethe retailer's intentto position the SBagainst NBlbased on extrinsiccharacteristics but still not accept that the SBoffers a similar levelof intrinsic product quality. Weaddress these issuesinStudy3.4.3 Study 3: Store Brand Positionin g and Con-

sumer Perceptions4 3 1 Method The task required consum ers tojudge the similarity between the topthree NBsandthe SB in eight different prod uct categories.Re-

spondents were 102 primary shoppersinhouseholdsrecruited through a local PTA.Thecategories we reyogurt, tomato sauce, toilet paper, canned peaches,canned tuna, chocolate syrup, peanut butter,andskin lotion. The SBs came from two local supermar-ket chains; 90%of respondents indicated that theyhad shopped at both stores within the past year.Foreach category respondents saw color picturesof thebrands linedup four acrossthe page (similartoFig-ure1) and then made oneof three similarity ratingsfor each of the {4choose 2} - 6 pairs: (1) Howsimilar overall are thefollowing pairs of brands? ,(2) Ho w similar are thefollowing pairs of brandsin termsof product quality? ,and (3) How similararethe following pairsof brands in termsofphysi-cal appe aranc e? Similarity rating were assessedona1 = very similarto 7 very dissimilar scale; typeof rating task was manipulated between subjects.There also were three within-subjects manipula-tions.Thefirst variab le waswhether or not the SBtargeted onespecific N B. Using da ta from Study1

we selected four categories where the SB clearlytargeted one of theNBs, in all cases here NBl;inthe other four categories, there wasnoclear target.The second variable wasthelocationof theSB rela-tiveto NBl in thevisual stimuli. Either theSBwasput adjacent to NBl (NB2, NBl, SB,NB3), or itwas separated (NBl, NB2, NB3, SB). Although thismanipulation hadabsolutelynoimpact,wethoughta priori that adjancency might increase similarity.Fi-nally,wem anipulated theprice differential betw eenNBland theSB; e ither theSB soldat a15%or30 /.

discount to NBl. Again, although this variable alsha dnoimpacton similarity ratings,wethought thconsumers would be more likely to believe thatSquality was comparable to that of NBl whenthprice differential was smaller. To summ arize, thoverall design wasa 3 rating tasks X 6brand paiX2levelsof targeting X2levelsof location X2 leelsofprice-mixed design w here thefour categorifor each levelof targeting were rotated across thelevels of location and price according to a Latsquare. Rating task wasabetw een subjects v ariaband level of targeting, price differential, anlocation were within subjects. We also collectedsupplemental information about SBfamiliarity, usa gand attitudes.

4.3.2. Results. Although the designiscomplicatethe resultsare robust, simple,and therefore easyinterpret. The results are displaye d graphicallyFigure 2. The six pairwise similarity judgmentsabroken downby typeof rating task: overall similrity, product quality similarity, and physical apearance similarity. For purposes of comparinindividual means,thecritical rangeis0.35.Asmetioned previously, there are no significant mainefects or interactions effects due to the pricelocation manipulations. The key effectis a significainteraction between rating task, brand pair,and targeting variable, f]o,47')4=5.64,p 0.0001. Similaty ratings differ systematically dependingonthe raing task and whether SB targeting is explicitambiguous. Both the overall similarity andproduquality similarity ratings produce comparable resuland do not differ systematically, depending on the tageting variable. Specifically, allofthe NBs are seenfairly similar (mean of 3.0 for overall and 2.7 for qualty similarity). In co ntrast, theS is viewe d as less similartoeachof the NBs (mean 4.2), especially N(mean=4.5). The results for overall and prod uct quaity similaritydo not differ much whether the SBplicitly targeted N Bl or targeting was a mb iguous.

It is only in the caseofphysical appeara nce that eplicit targeting has any impact. Specifically, whentSB purposefully targets N Bl, consum ers readilydtect the similarityinphysical app eara nce (3.0 vs. 5.


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SAYMAN, HOCH, AND RAJUPositioning ofStore randi

Figure Similarity Ratings DependingonExplicit Targetingof NBI from Study3

Exp licit Targeting Am biguous TargetingOverall Similarity

NB- .,, SB

Product Quality

N B _ SB

Physical Appearance

In addition, targeting reduces perceived similaritybetween theSBand both NB2 5.2 vs. 4.9) and NB34.7 vs. 4.1). Finally, because percep tion data areinfluenced by relative context, targeting also re-duces perceptions of similarity between NBl andboth NB2 4.3 vs. 3.1) and NB3 4.2 vs. 3.7).Table3shows a simplified view of the data focusing onsimilarity ratingsof SBand NBl and theaverageofthe similarity ratings of the SBwith NB2 and NB3.Table3 Similarity Ratingsof the SBwith NBI and NB NB3

Again the three-wa y interaction betwe en similaritytype, brand pair, and targeting is significantf2,1530 = 6.92,p 0.001. Explicit targeting of NBlby the SB has two effects: Respondents see the SBas more similar to NBl and less similar to NB2and NB3 but only in the case of physical appear-ance. In contrast, explicit targeting does not pro-duce the intended effect on perception of overallsimilarity or product quality,as theSBisviewed as

Type of SimilarityOveral lProduct qual i tyPhys ica l appearance

N B lvs.4.24. 53.0

ExplicitNBlSB

Target ingN B 2 NB 3 vs . SB

3.94 05 0

N B l v s . SB4 74.75.1

Ambiguous Target ingN B 2 NB 3 vs . SB

4.34.14.5

ote Lownumb ers indicate greater perc eived simi lar i ty


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SAYMAN, HOCH , AND RAJUPositioningo Store rands

slightly more similar to the secondary brands thanto NBl. This is also the case when the targeting isambiguous.

4.3.3. Discussion. The overall picture that emergesfrom Study 3 is as follows. When the retailer specifi-cally targets the leading NB using physical cues,such attempts do succeed to the extent that consum-ers easily perceive the proximal position of the SBrelative to NBl in the physical similarity space.Moreover, this positioning tactic also tends to dis-tance both the SB and NB l from the other NBs.However, it appears that consumers interpret thisphysical-cues-based positioning in a very literal andnarrow manner. What does not happen is discerniblecarryover from physical appearance space to percep-tions of either product quality similarity or overallsimilarity. Explicit targeting had no influence onconsu me rs perceptions of the SB and NBl in termsof overall similarity or product quality similarity. Infact, the SB was rated as more similar to the lowershare NB2 and NB3.

At first glance, these results might appear contra-dictory to our model. We believe, however, that theyprovide useful advice to the retailer, cautioningagainst attempts to position onto NBl solely throughthe use of superficial appearance cues. Market datain Study 2 is consistent with SB positioning next toNBlat least when SB quality is high. In terms ofour model, this suggests that the cost of successfullypositioning against NBl may be more expensivethan it appears. Not only will the retailer incur addi-tional variable costs associated with higher qualityingredients, but also they may need to offer steepdiscounts to encourage product trial and overcomeconsumer scepHcism. Alternatively, the retailer mayincur substantial fixed costs to successfully positionnext to NB l. Loblaw s successfully convinced Cana -dian consume rs that their President s Choice linewas just as good or better than the leading NB s, butdoing so required a substantial investment in mar-keting support.

5. ConclusionsRetailers are, or at least should be, interested in catgory profits rather than the profit from any specifbrand . In this paper, we examined how the retailerobjective function reveals itself in the optimal psitioning strategy of the SBs. Our contribution two-fold. On the theoretical side, we address the Spositioning problem. On the empirical side, we prvide evidence that SBs in fact aspire to compete withe category leader, although there is mixed evidenthat they are successful in doing so.

We frame the re tailer s p ositioning decision choosing the degree of competition between the Sand each of the NBs in the product category. Assuming a category with two NBs, we find that when cetain conditions identified in our model hold, the Sshould be positioned closer to the leading NB. Theconditions include the following: (i) The distanfunction is sufficiently convex (perceptual distance icreases rapidly as the SB is moves away from the tageted NB and so distance will have a less p ronounceeffect on the cross-price sensitivity), (ii) The cost avantage of not targeting is not too high. If these condtions are not met, or when the retailer is better ousing theS to target a unique segm ent of the m arkone may not observeS targeting the leading NB.

We examined whether the implications of the mdel are consistent with market data by conductithree empirical studies. We provide evidence thSBs indeed target the leading NB in the catego{Study 1). We also analyze demand-price relatioships in nineteen categories and find support for oconjecture that optimal positioning leads to greatcompetition between the SB and the leading NBwith stronger evidence from categories with higquality SB alternatives (Study 2). We find that evthou gh consu me rs can readily detect retailers effoto use extrinsic cues to position against the leadiNB, this knowledge does not necessarily translainto consu me r perc eption s that the SB offers co mprable intrinsic quality (Study 3).

Our analysis indicates that the retailer prefers have a SB that competes heavily with the NBs. Tbasic premise here is that it cannot increase bo


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SAVMAN, HOCH, AND RAJUPositioning of Store Brands

5i and 62 at thesame time.inwhich the positioning game

us to represent thetrade-offbe- 5] and62.In thepresenceof this trade-off, it

to have a high 61than a high 62.Hence,is arationaleforthe tende ncyofSBstoimitate

We model competition among the various compet- a reduced form framework that

of both vertical andhorizontaldif-thereduced form model does for the presence of specific

is a limitation of our mo-Alimitationof our empirical analysisisthatwe to form NB3 that,aspointedt bySethuraman et al.(1999),may have undesir-

on the cross-price estimates.There is empirical evidence that SBs do particularly

incategories with high co ncentration (Dhar anddobetter

it iseasierforconsumers tocompare the SB is a distinct category leader. Dharand

the SB can pursue a focusedin a concentrated market charac-

in tastes and offer anat-a lower price. Our analysisis

of Dhar and Hoch (1997),and weifsome conditions are m et, the focusofthatoning strategy shou ld be the leading NB.

One can visualize scenariosin which targetingthenot be the optimal strategy. Forex-

if thesecondary NB provides a much lower theleader,the retailer maybebetteroff

of the secondary NBtothe SB.a price-sensitive segment that val- it may bebetter to positione SB to specifically attract these buy ers. Alterna-

insome ca tegories targeting strategy m ay lead tobuyreal thing rather than the lower quality copy-

Inthis case,the retailer may choosetomakeits asdistinct aspossible. It is also possible that

to thecustomer mayhelp the retailer the unfulfilled needsor a niche market, thus to adifferentiated prod uct strategy.

AcknowledgmentsThis paper is based on the first aut ho r's doctoraldissertation at the Wharton School. The authorsthank theeditor, the former editor, the area editor,and the two reviewersfortheir insightful c om m ents.They also thank Nanda Kumar, Cenk Serdar, PierreChandon, Christophe Van den Bulte, and InsanTunalifor their helpinconducting this research.Appendix: Sketcho Proofso Key PropositionsSKFTCHOFPROOFOF LF.MMA1, To show that the retailer s categoryprofit is higher when the SB is on the line segment connecting theNBs, we first obtain the category profit for any 5, and 62. We startfrom Stage 3 and proceed backwards. The retailer s categoryprof-its are given by FT=ij|(pi - ri-i) + 172(2 - M2) + q2P,- The retailerchooses pi, P2 , and ps to maximize category profits. This is re-flected in the first-order conditions.

o ^ - 0. and ^ - 0.op 2 op.We use these to solve for p,, ^2. and p^ in terms of w^ and n 2 andsubstitute these in the demand function to get the demands interms of the wholesale prices. In Stage 2, NB manufacturerschoose their wholesale prices simultaneously to maximize their re-spective profits; n, = q^u ^ and II: = I72H'2.This is reflected in thefirst-order conditions

- = 0 and - = 0.(TU'i OW2We solve these and us ing w, andH'2,wewri te thedem and s , re ta ilprices, and retailer 's profit prior toposit ionin g (Stage 1) as a func-tion of mode l pa r a me t e r s . In thesymm etr ic case , we set a- = aj =1 and n, = f{a^, 61,52, 0). Wethen take theder iva t ive of II, wi threspect to 6,. Wefind that dU/S^i = / , ( ' ) / /2( ) w here /2( ' ) is strictlypos i t i ve , a nd / i ( ) can benegat ive for a subset ofparam eter va lues .We show tha t 3/i(-)/5s > 0,i.e.,/i() is increasing in 0,. We findthat jj^> 0.3 is a sufficient co ndition that will ensu re that fi() isposi t ive and therefore ()n /38i > 0 iffl > a .Similarly, if a^ > 0.3, then 311^/362 ispos i t ive . Hence , the retailerprefers higherft, and 62as long asa.. > < = 0.3. Higher 6, and 62mean smal ler d is tances to NB] and NB2respectively Using trian-gle inequality weshow tha t for anypoint outs ide thel ine segmentjoining theNBs,it is possible tofind acorrespo nding point on thel ine that has a smal ler d is tance to NB2, for example , keepingthe d is tance to NBlconstan t. Therefore, retailer 's profit ishigher ifthe SB is on thel ine segment connect ing theNBs than outs ide .' 'This appendix conta ins br ief ske tches of the proofs. Com ple teproofs are in a technica l a ppend ix avai lable on theMarketing Sci-encewebsi te (h t tp : / /mk tsc i .pubs . inform s.org) .


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SKFTCHt)F PROOFOF PROi-osniON 1. Wefirst exam ine thecondi-tionfor aprofitable SB introduction. A ccordingtoLemma1, opti-mal SB location is on the line segment joining the two NBs.Therefore,it issufficient totakeapointon this line segmentandcompare the retailer's profit in this case with the profit withouta SB.Let us assume that theSBis positioned right nextto a NB,Ifthe retailer's profit is higher with that positioning compared tonot havingaSB, then profit shouldbehigherfor theoptimal posi-tioningaswell.Let n denote the retailer's profit when theSBispositioned nexttothe first NB.Ii; isobtainedbysubstituting5, =1and 62 = intoH,.Retailer's profit w ithoutaSBisdenotedbyrir,,;inthis case, the game consistsofsettingthewholesaleand re-tail pricesofthe NBs. We obtainn; - n, =fj{-)/fi{-) where/4()isstrictly positive, andf^i-)can be negative or positive. Weshowthat~ d f - ^ , - ) /i ) a ^ > 0;hence,a higher base demand for theSB makesthe introduction profitable. The critical valueof (j,above whichintroductionof theSBisprofitable forthe retailerdependson fi.

Because the incumbent NBs are symmetric, 11 is symmetricwith respectto 5, and62: 11^(6,, 63,9) =n,(52,S,, 0) foran y h\ , 62.Therefore, 61 = 62 =K:has to be theextrenium. T his correspondsto the midpoint of the line segment, and 6,,, depends on /(rf).T here are three mutually exclusive cases:

(i) P ositioning the SB at the midpoint leads to less categoryprofits than positioningatany other pointon theline. T hus, eitherof theendpointsof the line (that is, targeting eitherofthe NBs)isthe optimal location.

(ii) Po sitioning the SB at the midpoint maximizes categoryprofits.

(iii) Retailer's profit is thesameforany pointon theline.T herefore,wecompare the profits from targetingandm idpoint

positioning. Category profit with the targeting strategy, IT', is thesame whether thefirstor thesecondNB is the target. AssumingNB l is thetarget,wesubstitute6| = 1 and 62 = f in n,- toobtainIt;. T he retailer's profit from positioningtheSBin themidd le, IT, ,is obtained bysubstituting 8]= 82 = h ,in II where6,,,dependson thedistance function f(d). Hence, retailer profits from targetingca nbe higher than profits from midpoint positioning dependingon 5 or/(if).If wetake thederivativeof IT with respect to 8,,,,we find that a > a,' = 0.3 is a sufficient condition that ensures3lT /95n,> 0.Basically, W 'isincreasingin6n,,andTV, doesnotde -pendon5,,|. Hence FI;- W '' decreases with increasingo,,,.

We then lookat the relationship between Ti; and theconvex-ity of the distance function f (d) . When the SBmoves fromNBlnext toNB2,Si decreases from 1 to 9. Theconvexityof the dis-tance function/(rf) imp lies that &,< (1 + B)/2. Roughly speaking,higher 5^, impliesa lesser degreeofconvexity oif(d). Toexaminethe limiting case,if we assume that f{d) is linear in the intervalcorresponding to (0, 1) and let5,,,= (1 - 9)/2,we find thatmid-point positioningismore profitable than targeting. This means thattargeting will be profitable only if 6,,, < 6 , < (1 + 0)/2.We arenot able obtaina closed-form solutionfor5^thecritical valueof5,n where the solution changes.Theratio5'y[(l -t- 0)/2] is a mea-

sure of how close f { d )should be to linearity in order toa midpoint positioning strategy more profitable than targetina sufficient conditionwe find that 8V|(1 -f B)/2]> 0.80. The rfor any/(./) with thecorresponding 5 , if S/[(l -I- 0)/2] < targeting is better than midpoint positioning.We emphasizthis phenomenon is a (sufficient) conservative constraint, wleadsus to the following conclusion:Aslong as /(d) isreasoconvexanda > a l= 0.3, targeting yields higher profits thamidpoint positioning strategy.

SKETCHOFPROOF O PRorosT iioN2. The analysisis thesamethe proofof Proposition 1,except thatnow the retailer's cateprofit isri;-=qi(pi - Wj) +c\2{p2 ~"'2) + 'Js(;' ~ ^) - whependson thepositionoftheSB. If theSB targetsaNB,k =Qcategory profit, Fi; is thesameas in the previous analysis.ISBispositioned at themidpoint,k= -k,,, , < cause II| diws not depend on k,,,and ?>, , weexamine hchanges with k,,,and 6,,,.We show thatdW' /dk,,, >0 for a0,andhU' l'/fth,,,> 0 ifa.,>0.3asinP roposition1,this phno nis a conservative (sufficient) condition.

T herefore, U ' increases with increasingk and S ,wheredoesnotdepend on*:,and 8,,,. For a given5,,, fc*will make m idpoint po sitioning profitable. Using implicit function theorem,weshow that

^ = - ^ < 0 where r{k ' . s,,,. 0) = n; - n;' = o.Oil,., dFi_

In other words, if thecost advantage of midpoint positionihigh, a mo re convex distance function (sm aller ft,,,) willead totargetingas theoptimal positioning strategy.

SKLICH OF PROOFOF PROI-OSITION 3. As with the symmetric we first need to obtain the retailer's profit for any6,and 6start from Stage3 and proceed backwards toobtain theretaprofit priorto thepositioning stage. To obtain the profit fromgeting NBl,wesubstitute 81= 1 and 82 = 9 Titon, (wealrti= 1 without losinganygenerality).LetTl; repr ese nt profittargeting thestronger NB. Similarly, s ubstituting6| = 0 and1 intoII, andsettinga, = 1, weobtain thereta iler's profittargeting NB2represented byFI;'. Weareabletoshow thatIT, > 0.T herefore,Ii; = I ;

SKF:TCHOF PRCKIFOFPROPOsmoN4.Using theexpressionsan d Ii"'from theproof of Proposition3, wetakethederivat(Fi; - W; ' ) w.r.t.fl and show that D(n;- U';yiia2


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