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 that the products are similar. 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 horizontal product differentiation and local share advantages. Namely, I find that local share advantages can be sustained especially if competing brands are objectively similar. Conversely, local share advantages can not be sustained if brands are dissimilar. This paper provides two independent intuitions for this result. First, if brands are objectively similar, different levels of investments in local quality perceptions can co-exist in the same market. Specifically, if it pays to do so, early movers will invest in high perceived quality. Late movers have reduced incentives to invest because of subsequent demand sharing and price competition. Second, if the perceived quality advantages are geographically distributed across competitors, the above argument is reinforced by multimarket contact. Even if local "brand building" is free, firms have an incentive to sustain asymmetric market shares because, holding total demand constant, multimarket profits are increasing in share variation, i.e., monopoly power, across regions. This increase is steeper when the products are similar, because price competition looms large.JEL Classification: L11, L15, L22, L66, M30, R12

On Brands and Word of Mouth

“…We advise brand managers to determine both points of parity and points of differentiation. To justify the costs of creating differentiation, scholars have attempted to explore their benefits and discuss conditions under which differentiation should be pursued (Bronnenberg 2008;Dubé 2004;Schmalensee 1982). Our work contributes to the discussion by identifying a novel benefit of product differentiation beyond brand perception and competitive positioning.…”