Brand competition in CPG industries: Sustaining large local advantages with little product differentiation

Abstract

In direct competition between national brands of consumer packaged goods (CPG), one brand often has a large local share advantage over the other despite the similarity of the branded products. I present an explanation for these large and persistent advantages in the context of local competition on perceived quality or brand image. The main result of the analysis is a relation between varying degrees of product similarity and equilibrium outcomes of local share advantages. Namely, I find that asymmetric quality positioning and associated local share advantages emerge especially when competing brands are objectively similar. Conversely, local share asymmetries based on brand positioning occur less when brands are dissimilar. This paper provides two reinforcing intuitions for this result. First, if brands are objectively similar, different levels of investment in local quality perceptions co-exist in equilibrium in the same market, because this investment is often borne as fixed cost. Also, early movers will invest in high perceived quality, whereas late movers have less incentive to invest because of demand sharing and increased price competition. Second, if the local advantages are shared by competitors across markets, the persistence of these advantages is reinforced by multimarket contact. Even when local brand building is free, firms may not want to improve perceived quality in their "weak" markets if it initiates retaliation by the competition in their "strong" markets. The increase in multimarket profits from collusion is large when the products are similar, because price competition looms large.

A Dynamic Model of Competitive Entry Response

“…Previous theoretical literature in economics and marketing has studied optimal defensive strategies (Schmalensee 1978 Previous theoretical research has also shown that multi-market contact in a repeated game can help firms sustain high prices (Bernheim and Whinston 1990) or sustain an arrangement in which they focus on different markets (Karnani and Wernerfelt 1985;Bronnenberg 2008). The current paper differs in two key respects.…”

“…This assumption ensures the market is covered in equilibrium and that, when firms use different formats (at state (1, 0; 0, 1)), they each set the monopoly price. 6 Given this set-up, the online appendix proves that an equilibrium exists in which prices are as follows. If a firm is the only one that uses a format, it sets price V − β in that format; if both firms use a format, they each set price β in that format.…”

“…The following condition is sufficient to ensure (6) holds. This condition also ensures that if d is small enough, an equilibrium exists in which the incumbent invests nothing at the initial state (1, 0; 0, 0), guaranteeing that the industry reaches the absorbing state (1, 0; 0, 1).…”

The Formation of Consumer Brand Preferences

“…In some cases, an early entrant may invest in a large goodwill stock to soften the effect of future competition (Schmalensee, 1983;Fudenberg and Tirole, 1984). A related literature has studied the entry-deterring effects of large fixed investments in a sustainable product quality advantage to deter later entrants or to soften future competition post entry (Lane, 1980;Moorthy, 1988;Sutton, 1991;Lehmann-Grube, 1997;Bronnenberg, 2008). More recently, Doraszelski and Markovich (2007) show how initial advantages to one firm can persist in the long-term using a more realistic model with an infinite horizon and firms investing in competing, depreciating advertising stocks.…”

Impacto del franquiciamiento en el desarrollo

“…de la calidad, la publicidad y la distribución de la marca, tales como el espacio en la estantería afectan a la calidad que se percibe (Bronnenberg, 2008). Ley de franquicias (x 3i ): la variable toma 1 si existe ley de franquicia en un país, 0 caso contrario.…”