The impact of supermarket product differentiation with asymmetric information on consumer behavior

This dissertation examines the empirical evidence behind the significant growth in the sale of private label food products. Previous research has shown a significant market share for supermarkets' own private label brands, which has been trending upward in recent years, from 15% in 1995 to 20.1% in 1999. To provide some insight into the explanation for these empirical findings, individualized consumer food purchase data has been linked with advertising data for brand and private label food products, thus allowing the study to assess the price and information determinants of the consumers' demand for private label food products. The major question examined in this thesis is the following: does the consumers' response to the relative advertising intensities for brand and private label products affect the products' market share or has the success of private label products been due solely to price considerations. The research tests these competing hypotheses by using Tobit regression analysis that relates economic and demographic characteristics of the consumer, as well as product specific data on prices and promotion to the purchases of food products. The underlying methodology is based on conventional utility maximization procedures, but an important feature is that information is an argument in the utility function. With information involved in the utility maximization process it then finds its way into the demand function. The analysis uses a new and unique database produced by AC Nielsen, which is sampled from a 52,000-member panel of households, that is geographically dispersed and demographically representative. The sample is spread across fifty-two markets within all four U.S. census regions. Advertising data is provided by the publication, Leading National Advertisers/Media Watch. The research shows an overwhelmingly positive response to advertising across all food categories, except for frozen plain vegetables. The other explanation of the empirical results of the growth of private label food products on market share relates to the effect of relative prices. Estimated price effects suggest that the consumers view private label and brand food products as imperfect substitutes. This means that even with a narrowing of the price gap between the two, the share of private label expenditures will continue to rise.