National brand's competition with premium private labels: The role of context-dependent preferences

Retailers are expanding their private labels into multitier settings by introducing premium private labels (PPLs) that are quality equivalent to national brands (NBs), and thus in direct competition with the latter. However, recent empirical findings cast doubt on the existence of this relationship. We reconcile this discrepancy by adopting a modified utility model with context-dependent preferences. While the literature shows that consumers prevalently exhibit context-dependent behavior in retail markets and that models adopting this behavior better explain the market data, our results reveal that quality-equivalent PPLs can benefit NBs by shifting consumers’ preferences from low- to high-quality tiers. The NB manufacturers’ gain in the inter-tier competition can offset their loss in the intra-tier competition; thus, NB manufacturers may indeed benefit from PPL introductions. Based on our updated utility model, we provide more accurate guidelines to the NB manufacturers to help them profitably compete with PPLs.