Content Frame
Skip Breadcrumb Navigation
Home  arrow Student Resources  arrow Chapter 7: Product Differentiation and Monopolistic Competition  arrow National Brands versus Private Labels and Generics

National Brands versus Private Labels and Generics

National brands generally sell for more than house brands (private labels, such as Safeway's Cragmont or Town House labels) or generics. Presumably consumers believe that the national name brands are of higher quality. Whether this belief is true or not is irrelevant to the market outcome so long as consumers believe it.

There is very little difference in quality between some national brands and store brands, such as aspirin and bleach; yet consumers pay substantially more for national brands. In other cases, such as some canned fruits and vegetables, there are substantial differences between national brands and generics that consumers can determine in blind taste tests.

It is often difficult to determine, without careful chemical analysis or blind taste tests, whether house brands or generics are equivalent to national name brands. There is good reason for uncertainty. For example, Wonder Bread produces many of the private-label breads. That does not imply, however, that private brands are necessarily of the same quality as the name brand. Wonder Bread may vary its formula when it produces private brands, and the private brands may not be as fresh.

Similarly, Falstaff, one of the largest brewers of beer in the United States under its own label, is also the largest supplier of private-label beer. Most private-label brands of bourbon, scotch, vodka, and gin are produced by well-known name-brand companies. Sears often induces major manufacturers of typewriters, water heaters, and other products to produce Sears (Kenmore) brand products to the same or higher standards than the manufacturer's own brand.

Consumers may be willing to pay more for national brands to avoid the risk of buying a low-quality product. As a result, if they can be induced to try the cheaper brands and can see that their quality is as good as the name brand's, they may switch.

A Gallup Poll found that nearly 80 percent of people who try a product with a store-brand label become repeat buyers. Typically the store-brand buyer is a better-educated, affluent person who reads and understands the labels.

Many consumers do study labels and prices. The Gallup Poll indicates that 40 percent of shoppers shop selectively: They do not just choose the national brand, but compare products on a variety of dimensions (quality, price, and special offers). Nonetheless, nationally, only 2 or 3 percent of store-brand sales are generics.

Many, but not all, national-brand products are of a superior quality and hence sell for substantially higher prices than private labels. The Private Label Manufacturing Association had an independent research firm compile a "Market Basket List" for 17 staple items in June 1984 (shown below). The total cost for the private labels was $25.59 compared to $34.15 for the name brands. Thus, private-label shoppers pay $8.56 less (25 percent less), though not necessarily for comparable quality items.

Size

Name brand

Private label

Corn flakes

Orange juice, concentrated

Coffee, regular grind

Margarine, stick

Bacon, sliced

Peanut butter, creamy

Grape jelly

Chili with beans

Cut beans, frozen

Mashed potatoes, instant

Vegetable oil

Pineapple chunks

Aluminum foil

Plastic wrap

Toilet tissue, 2-ply

Disposable diapers

Dish detergent

18 oz.

6 oz.

16 oz.

16 oz.

16 oz.

18 oz.

18 oz.

15 oz.

9 oz.

16 oz.

48 oz.

20 oz.

75 ft.

200 ft.

4-pk.

48 ct.

32 oz.

$1.35

.76

2.79

.72

2.61

1.62

1.32

1.01

.78

1.41

3.24

.90

1.70

1.54

1.33

9.01

2.06

$1.12

.59

2.37

.54

1.81

1.41

1.06

.82

.57

1.17

2.07

.79

1.62

.79

1.02

6.73

1.11

A market with a small number of name-brand products and a number of generic products is said to consist of an oligopoly with a competitive fringe. See Chapter 4 for a discussion of the analogous market structure of a dominant firm with a competitive fringe.

SOURCE:

Morch, Al. "Off-the-Shelf Advice on Saving Money." San Francisco Sunday Examiner and Chronicle, August 5, 1984: Scene 4.

© 2000 Dennis W. Carlton and Jeffrey M. Perloff. Reprinted by permission.





Pearson Copyright © 1995 - 2010 Pearson Education . All rights reserved. Pearson Addison Wesley is an imprint of Pearson .
Legal Notice | Privacy Policy | Permissions

Return to the Top of this Page