The Role Of Private Label In The Horizontal Competition Structure

In USA and Europe, especially the United Kingdom, the evolution of the grocery retailing industry has witnessed increased penetration and proliferation of private label products. However relevant literature on why retailers sell private label products is still quite inadequate. Most of the present models focus on private label products' role in the vertical structure under which the retailers compete with the manufactures. What's more, they often assume the downstream monopoly market structure and regard private label products as a single product without concerning the diversity of private label products, which can be quite misleading. Noticing the weakness of the literature, this work investigates the private label products' role in the horizontal structure under which the retailer competes with other retailers. And it embodies the idea of diversity of private label products which include national brand products, high quality private label products and low quality private label products.After introducing the background information of the UK grocery retailing industry and the present literature on why retailers sell private label products, it first brings out the characterization of the three product variable from the demand side and from the supply side. Secondly it gives some information about the monopoly market structure as this work's rationale. Thirdly it brings out theoretical reasoning of what composite price dispersion and gives 6 hypotheses by linking the characteristics of the 3 product variables and price dispersion. In the empirical test section, this work uses Wilcoxon test to test these 6 hypotheses. The results show that hypothesisl, 4, 5 and 6 are supported while hypothesis 2 and 3 is rejected.The main conclusion is that cost asymmetry, compared with the asymmetry in the probability of retailers differentiating the products, plays a dominant role in the formation of heterogeneity of price dispersion. Hence retailers can use private label product as a tool to reduce the price competition in the horizontal structure.