Social consumption and price rigidity of quality-tier differentiated private labels

Abstract

We are interested in the extent to which quality-tier differentiation of private label (PL) contributes to explaining their greater price rigidity during holiday periods, when social consumption motives may influence retailer category management. After controlling for wholesale cost pass-through, product and store effects, we find social consumption theory to provide the best explanation for greater PL price rigidity during the Christmas period. Although this effect does not extend to other periods of peak demand or across product categories, our results underscore the importance of consumer considerations in firm-level price setting discussed by Blinder et al. (1998). More generally, this article emphasizes the growing importance of quality-tier differentiated PLs in retailer’s pricing and promotional strategies.

Keywords:

• holiday price rigidity
• social consumption
• quality-tier differentiation
• private label

JEL Classification:

• E31
• L81
• M31

Acknowledgements

We acknowledge the Stanford Institute for Economic Policy Research (SIEPR) and Giannini Foundation at the University of California at Davis for providing access to the scanner data. We are indebted to Kristin Kiesel for assisting in data access and Qing Chen for technical support.

Notes

¹ To mitigate the potential of measurement error in weekly price variations, we define a price change only of it exceeds 4.9 cents.

² Birthday of Queen Victoria’s (last Monday before May 25).

³ Identical to the Christmas periods specified in Müller et al. (2006) and Levy et al. (2010).

⁴ Random-effects probit models produced qualitatively similar results. Model corrected for heteroscedasticity and autocorrelation in the underlying data.

⁵ For variable summary statistics, see Appendix.