Conditional cross-brand learning:

When are private labels really private?

2007

Maciej Szymanowski

Els Gijsbrechts

The growth of retailer-owned, or private label brands, is one of the most notable trends in
marketing over the past decades. While much of the research on private labels relates to
the competition between private labels and national brands (Cotterill et al. 2000; Du and
Staelin 2005), Private labels also appear to be a key element in the context of retail
competition (Ailawadi and Keller 2004). Extant research focusing on the latter topic
suggests that private labels are a key tool for store differentiation (e.g., Corstjens and Lal
2000), yet others imply that consumers may not distinguish between private labels of
different chains (Ailawadi and Keller 2004). As such, it is not a priori obvious when
investments in private label quality positioning set retailers apart from competition, and
when they spill over to and subsidize rival private labels.

In this research, building on categorization theory (Anderson 1991), we hypothesize that

consumers group private labels into a mental category and generalize the knowledge
gained through product experience across private label brands. That is, consumption of
one private label brand leads consumers to update their beliefs about the quality of other
private label brands, not only the one consumed. Moreover, we argue that the strength of
such cross-brand learning among private label brand pairs is conditional on their
perceived quality similarity – which decreases with actual brand differences and as
consumers gain more product experience.

By extending existing brand choice models with Bayesian learning (Erdem and Keane
1996), we develop a framework that captures this conditional cross-brand learning
through two types of reputation spillovers: (i) quality perception spillovers (consumers
adjusting their mean beliefs about a private label’s quality based on the consumption
experience with other private labels), and (ii) familiarity spillovers (consumers’
uncertainty about a private label diminishing with the consumption of rival retailer
brands). Our framework implies that a private label’s quality positioning determines the
sign and magnitude of those spillovers.

When a private label brand is positioned higher in quality than the other private labels,
the effects on its choice probability of the two types of spillovers are opposite. On the one
hand, the brand suffers from quality perceptions spillovers, as its quality belief is partially
based on the experiences with other, lower quality private labels. On the other hand,
provided that consumers are risk averse, its choice probability is enhanced by familiarity
spillovers that make consumers less uncertain about the brand’s quality.

Conversely, private label brands positioned below the quality of rival private labels find
their choice probability elevated by both types of reputation spillovers. This time, while
familiarity spillovers are still beneficial, the quality perception spillovers are also positive
because the brand’s quality perception is inflated by consumers’ experiences with other,
higher quality private labels.

The magnitude of both types of spillovers diminishes as brands become more dissimilar
and as consumers gain more knowledge on the brands’ quality. The framework also
implies that while private label differentiation is achievable through a highly superior
quality positioning, it involves foregoing benefits that can stem from spillovers. Based on
those insights we identify potentially viable quality positioning strategies for private
labels: ‘free-riding’ (below average quality), ‘herding’ (average quality), and ‘quality
leadership’ (substantially above average quality).

The model is estimated using household scanner panel data for the dish detergent
category. The results support the ‘contingent cross-brand learning hypothesis’. We
empirically assess the net effect of the two types of spillovers (quality perception and
familiarity spillovers) and find a dominant effect of familiarity spillovers, favoring a
‘herd with free-riding’ strategy. Retailers striving for a ‘quality leadership’ positioning of
their store brand should, in contrast, establish a sufficiently large quality gap to break
away from rival private labels’ spillovers.

References
Anderson, John R. (1991). The Adaptive Nature of Human Categorization. Psych. Rev. 98 (3), 409-29.
Corstjens, Marcel., R. Lal (2000). Building store loyalty through store brands. J. Marketing Res., 37 (3),
281-91.
Cotterill, Ronald W., William. P. Putsis, Ravi Dhar (2000). Assessing the competitive interaction between
private labels and national brands. J Business, 73 (1), 109-37.
Du, Rex, Eunkyu Lee, Richard Staelin (2005). Bridge, Focus, Attack, or Stimulate: Retail Category
Management Strategies with a Store Brand. Quant. Econom. Marketing. 3, 393-418.
Erdem, Tülin, Michael P. Keane (1996). Decision-making under uncertainty: Capturing dynamic brand
choice processes in turbulent consumer goods markets. Marketing Sci. 15 (1), 1-20.