Price Rigidity, Wholesale Price Pass-Through, and Quality-Tiered Private Labels in Grocery Retailing

Quality-tiered private labels product lines that present shoppers with simplified quality signals in the form of economy, standard, and premium quality labeling have become an established product assortment strategy for grocery retail chains in many markets, including across North America. Large literatures in economics and marketing have analyzed the effects retailer private labels and their competitive relationships with manufacturer brands have on market players and consumers. However, impacts of private label development on wholesale prices and their effects on the frequencies of retail price changes (price rigidity) remain largely unanswered. Appropriate wholesale price data to investigate these questions still remain scarce. This paper fills this research gap by analyzing retailer-pricing behavior (price rigidity) and wholesale passthrough patterns for product categories with quality-tier differentiated private labels. The analysis employs a scanner-dat set rich in detailed product information, including product-specific retailer prices paid for both private labels and manufacturer brands. The results of different econometric models of price rigidity reval the speed of wholesale passthrough to differ across categories, quality tier, and the direction of price adjustment. Overall, we find wholesale price adjustments to play a secondary role to retailers’ strategic use of price promotions for both private label and manufacturer brands in explaining price rigidity across grocery categories with quality-tiered private labels.