Introduction

Private labels have become a common phenomenon in retail outlets. These labels, procured and sold by the retailers, increasingly dominate shelf space and benefit from brand power in their own right. In the majority of outlets, private labels compete alongside traditional brands to satisfy consumers’ need for economy or premium products.

This chapter explores the nature of competition between private labels and brands. Commentators generally see the proliferation of private labels as contributing to a more competitive environment, to the benefit of consumers. However, at times private labels may lead to mixed effects and could reduce consumer welfare in the long run. This chapter considers the unique characteristics of label/brand competition, which combine horizontal, vertical and market power elements. These mixed characteristics pose a challenge to traditional competition analysis. An interesting question subsequently emerges – can traditional competition analysis capture the complex competitive landscape and accurately weigh the short- and long-term effects of private labels on competition?

The first section of the chapter describes the proliferation of private labels and the central role played by supermarkets and other retailers in brand competition. The second section explores the unique characteristics and the possible welfare effects of label/brand competition. The third section explains the limitations of traditional competition analysis and reflects on possible enforcement options.

The proliferation of private labels

A private label is a brand owned by a retailer, and which upstream manufacturers produce according to the retailer's specifications. Private labels 180are brands in their own right, and often have significant consumer following and associations. This chapter will therefore refer to private labels as ‘private brands’ to distinguish them from ‘traditional brands’.

Over the past five decades retailers have steadily grown in size, from local, specialised shops, to large supermarkets. The largest supermarket chains now achieve similar or greater sales to the largest manufacturers of consumer goods. For example, in 2005 the French retailer Carrefour achieved sales of $94 billion, while the largest manufacturer of consumer goods (Nestlé) achieved sales of $75 billion. CocaCola, the eighth largest manufacturer of consumer goods, only achieved sales of $23 billion.