Modeling and Testing Strategic Pricing, Product Positioning, and Couponing Behavior By Food Manufacturers and Retailers

Open Access
Author:
Wu, Ping-Chao
Graduate Program:
Agricultural Economics
Degree:
Doctor of Philosophy
Document Type:
Dissertation
Date of Defense:
December 04, 2009
Committee Members:
  • Edward C Jaenicke, Dissertation Advisor
  • Edward C Jaenicke, Committee Chair
  • Spiro E Stefanou, Committee Member
  • Alessandro Bonanno, Committee Member
  • Ruilin Zhou, Committee Member
Keywords:
  • National Brand
  • Coupon
  • Product Positioning
  • Private Label
Abstract:
This research explores the competition between a food manufacturer and a retailer through the use of pricing, positioning, and couponing behavior. Both cooperative and non-cooperative strategies are examined. The demand side of the market is composed by two respective consumers, one who is relatively insensitive to price, and the other who is relatively sensitive. A series of specific retailer decisions are examined, including the following: offering a private label (store brand) product or not, positioning the private label in terms of quality (vertical) and feature (horizontal) differentiation relative to the manufacturer’s national brand product, and setting the retail prices and offering cents-off coupons for both products.<br> <br>As current literature focuses on the pricing strategies taken by the incumbent manufacturer(s) and retailer(s), their couponing strategies haven’t been formally modeled and clarified. In particular, how their couponing strategies are impacted by the threat of private label and the private label offering hasn’t been addressed before. Besides, given the relationship between private label expansion and couponing activities found in the existing empirical literature, no formal analysis and re-examination of the relationship has been presented. Meanwhile, the issue whether the private label customers are all price-sensitive hasn’t been confirmed, and therefore becomes one of the targets of this research. By considering both non-cooperative strategies and cooperative strategies, the research intends to provide a more thorough picture of the interaction between the incumbent manufacturer(s) and retailer(s).<br> <br>This research shows that when the manufacturer and the retailer take non-cooperative strategies, the private label’s retail price is related only to its quality level, and the retailer’s coupons for the private label are simply determined by the difference between consumer types: greater consumer difference in willingness to pay brings higher coupon values. Similar patterns of the private label’s price and coupon value hold when the retailer cooperates with the manufacturer.<br> <br>However, the national brand’s prices (wholesale price and retail price) and coupon values (manufacturer’s coupon and retailer’s national brand coupon) are conditional on a number of factors, including whether or not the manufacturer and the retailer cooperate or not. When the manufacturer and the retailer take cooperative strategies, the national brand retail price reflects only its own quality level no matter whether the private label is introduced or not, and the national brand’s total coupon value determined jointly by the manufacturer and the retailer is equal to the consumer type difference.<br> <br>Alternatively, when the manufacturer and the retailer take non-cooperative strategies, the threat of the private label’s entry always drives the national brand’s wholesale price and retail price down, no matter the threat comes from either higher private label quality or larger feature differentiation. However, with the presence of the private label, the national brand’s wholesale price and retail price basically decrease with the quality for the private label but increase with feature differentiation. The retailer’s national brand coupon value is based on the value of the manufacturer’s coupon: as the manufacturer increases (decreases) the coupon value, the retailer decreases (increases) its own national brand coupon. <br> <br>No matter what strategies are taken, the research points out the emergence of three scenarios depending on the positioning of the private label. First, it is possible that the private label product is not offered. Second, the private label product might be offered but targeted to and consumed only by the consumer with higher willingness to pay, rather than the price-sensitive consumer. And third, the private label product is offered to and consumed by both types of consumers. In other words, (i) the target customer of the private label product is therefore not necessarily the price-sensitive consumer, and (ii) store coupons for the private label product are offered to the price-sensitive consumer only in the third scenario but not the second.<br> <br>The research shows that if the retailer offers the private label, it is always positioned at the highest possible quality (vertical differentiation) no matter what strategies are taken by the retailer and the manufacturer. However, while a very different feature strategy (horizontal differentiation) is always the best under cooperative strategies, the retailer under non-cooperative strategies may choose similar features thereby imitating the national brand to a degree such that the price-insensitive consumer is the target customer of the private label product and the second scenario therefore emerges.<br> <br>Focusing on the relationship between the private label expansion and non-cooperative couponing strategies in Sethurman and Mittelstaedt (1992), this research shows that the private label value market share and volume market share are irrelevant to the retailer’s private label coupons, which coincides with the finding in Sethurman and Mittelstaedt (1992).<br> <br>However, while Sethurman and Mittelstaedt (1992) find that manufacturer’s coupons (store coupons for the national brand) curb (contribute to) the private label value market share and the private label volume market share, this research shows that when the private label expansion is primarily driven by the degree of feature differentiation, manufacturer’s coupons (store coupons for the national brand) decrease (increase) the private label value market share only in the private label position with very high quality relative to the national brand and very large feature differentiation from the national brand. Moreover, either when the private label expansion is driven by an increase in the private label quality or an increase in its feature differentiation from the national brand, the manufacturer’s coupons (store coupons for the national brand) always increase (decrease) private label volume market share. This research therefore suggests that the private label quality or the degree of feature differentiation alone can’t fully explain the relationship between the private label expansion and non-cooperative national brand couponing strategies.<br> <br>Finally, this research empirically tests the retailer’s couponing strategy and shows that an increase in horizontal feature differentiation lowers the leading retailers’ coupon values of store-level leading national brand products. This result confirms the theoretical prediction. On the other hand, an increase in feature differentiation has no impact on coupon values of leading private label products. Both results are supported by a robustness check.