UAM Marketing Research Paper Series. Number 1

Aims and Scope
We are very pleased to announce a new online publication, UAM

Marketing Research Paper Series, edited by the Department of Finance and
Marketing Research, Universidad Autónoma de Madrid. This is an annual
anthology of prospective papers submitted by our faculty members.
Our objective for this working paper is two-fold: to stimulate research

activities in our Department, and to provide a platform where researcher can
publish their results, and receive useful feedbacks from the audience. This
project is planned as a part of "Master in Marketing" of our department.
This first volume includes four papers, which were elaborated in a variety
of research interests. We hope that they serve as informative as well as
useful references for international researchers. We thank all the people
involved in this publication process. In particular, we appreciatively
acknowledge the support of anonymous professors from various
universities, who voluntarily reviewed our papers. Your collaboration was
sincerely appreciated.
Sincerely,
Director, Dr. Monica Gómez
Managing Editor, Dr. Shintaro Okazaki
Editorial Board:
Dr. Angel Nogales
Dr. Alfonso Rebollo
Dr. Ignacio Redondo
Dr. Maria Jesús Yagüe
UAM Marketing Research Paper Series
Volume 1: June, 2005
Contents
Title Authors Page

THE EFFECT OF PRICE PROMOTIONS ON THE SARA CAMPO MARTÍNEZ
TOURIST'S LOYALTY TO THE TOUR 1-15
OPERATOR AND THE TRAVEL AGENCY
MODELLING RETAIL PRICE LEVELS: IGNACIO CRUZ ROCHE,
AN ANALYSIS OF THE DIFFERENCES JAVIER OUBIÑA 16-32
BARBOLLA AND MªJESÚS
BETWEEN FRESH AND PACKAGED PRODUCTS
YAGÜE GUILLÉN
THE EFFECT OF USAGE SITUATION ON JAIME ROMERO DE LA
PURCHASE BEHAVIOUR OF CONSUMER FUENTE 33-43
GOODS
IMPLEMENTATION OF STORE BRANDS AND NATALIA RUBIO BENITO
ALTERNATIVE STRATEGIES FOR 44-59
MANUFACTURER BRANDS
THE EFFECT OF PRICE PROMOTIONS ON THE TOURIST'S LOYALTY TO THE TOUR OPERATOR AND
THE TRAVEL AGENCY
THE EFFECT OF PRICE PROMOTIONS ON THE

TOURIST'S LOYALTY TO THE TOUR
OPERATOR AND THE TRAVEL AGENCY
SARA CAMPO MARTÍNEZ1
ABSTRACT
To maximize their long-term business profits, tourism distribution agents should concentrate
their efforts not only on attracting new consumers but also on keeping them loyal.
In this market, travel agencies usually offer the consumer price discounts on their tourist
packages to motivate sales in the short term. However, these promotional policies are established
in many cases without taking into account their effect on the business results in
the long term. This study analyzes the variables that form the consumer's loyalty to tourism
distribution agents by means of an empirical study directed to consumers who have travelled with
a tourist package and introduces the effect of promotions on the price of trips. In this process, it
is not common to incorporate either the effect of the price perceived or the.
influence that the promotions exercise. The results obtained indicate that promotions
on trips do not erode consumer loyalty directly and that the key to agents obtaining
loyal consumers is to offer a trip that provides a service perceived as high quality.
KEY WORD
Price promotions, loyalty, satisfaction, perceived quality,
tour operator, travel agency, tourism
1
Department of Finance and Commercial Research, Business Studies Faculty, Universidad Autónoma de Madrid, Campus de
Cantoblanco, Ctra. de Colmenar Viejo, km. 15, 28049 Madrid. Spain. E- mail: sara.campo@uam.es. Tel: (34) 91 497 8669.
Fax: +34 91 497 8725.
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1. INTRODUCTION
In travel agencies, it is common to find tourist packages at promotional prices. These discounts
are fixed by the tour operator and offered to the consumer through travel agents with the goal of
stimulating sales in the short run. However, it is probable that when planning agents do not take
into account the effect that the promotions can have on their business results in the long run.
If consumers become accustomed to acquiring trips at advantageous prices, they can become
bargain seekers unwilling to pay the regular or base prices published in the catalogues. As a
result, the tour operators and travel agencies are sacrificing future benefit for short-term sales.
Thus tourism distribution agents must be aware of the variables that contribute to generating
loyal consumers and know the ability of promotions to attract consumers and retain them as loyal
clients. The importance that the effects described have on the results of firms in the distribution
channel of tourist packages contrasts with the scarcity of scientific studies that have studied them.
The goal of this study is twofold. On the one hand, it attempts to verify which variables condition
the tourist's loyalty to the distributors of tourist products (the tour operator and the travel agency)
and how this influence develops. On the other hand, it claims to analyze the effect that price
discounts on tourist packages have on the level of loyalty. To accomplish these objectives, we use
contributions from in the literature to form a theoretical model for the formation of the tourist's
loyalty to the tour operator and the travel agency. This model introduces the effect of price
promotions for combined trips into the process. We then describe the methodology used to
contrast the theoretical model and present the main results of the study. Finally, we present the
main conclusions of the study as well as its limitations and future lines of research.
2. THEORETICAL FRAMEWORK
Consumer loyalty is defined by Oliver (1997, p. 392) as "the behavior of choosing to return to
buy or be the client for a product or service in the future, in spite of external commercial
influences and efforts that may potentially influence a behavior of change ." This definition of
loyalty includes willingness to choose an alternative because it is considered better than the rest
(cognitive loyalty); positive attitude to the brand derived from satisfaction with the purchase
(affective loyalty); and the intention of repeating the purchase (connative loyalty) (Andreu,
2001). These levels of loyalty are the result of the consumer's satisfaction with the purchase and
will influence the firm's profitability positively (Berné, Múgica and Yagüe, 1996).
The academic literature demonstrates the existence of a positive relation between quality
perceived by the consumer, satisfaction and his or her degree of loyalty, which is usually
measured as intended behavior after the purchase (Bearden and Teel, 1983; Szymanski and
Henard, 2001, quoted in Andreu, 2001; Cronin and Taylor, 1992). The relation between
perceived quality, satisfaction and loyalty has been the object of debate in the literature since the
pioneering work of Parasuraman, Zeithaml and Berry (1985; 1988), who defined the quality
perceived by the consumer as an overall evaluation close to the attitude, which suggests that the
consumer's satisfaction with the service received contributes positively to his or her evaluation of
perceived quality. Cronin and Taylor (1992) revise these concepts profoundly and conclude that
the perceived quality of the service is a variable that precedes satisfaction. Their results indicate
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that the effect of both variables on the intention to buy varies as a function of the service
analyzed but also that the magnitude of the effect of satisfaction is greater.
In recent years, these relations have been enriched by new studies from the perspective of
relational marketing (Berné, et al., 1996; 2001) and applied to the tourist market (Baker and
Crompton, 2000; Bigné, Sánchez and Sánchez, 2000; Campo, 2004; Pedraja, 1998; Petrick and
Sirakaya, 2004 or Yen-Lu, 2004). The results obtained reaffirm the importance of offering
quality service and obtaining customer satisfaction to obtain loyal consumers.
The effect of price promotions on the formation of consumer loyalty has sparked constant debates
and contradictory results in the literature. Some authors, drawing on the theories of Self-
Acceptance or Behavioural Learning, affirm that price promotions cause a decrease in the
consumer's loyalty when they are withdrawn (Dodson, Tybout and Sternthal, 1978; Guadagni and
Little, 1983; Jones and Zufryden, 1980; Kopalle, Mela and Marsh, 1999 or Shoemaker and Shoaf,
1977).
A second group of studies developed in the last two decades of the past century (Davis, Inman
and McAlister, 1992; Ehrenberg, Hammond and Goodhardt, 1994; Neslin and Shoemaker, 1989)
affirm that no relation exists between price promotions of a brand and repeat purchases. They
maintain that the results obtained in other studies are due to methodological problems of
measurement and to the omission of variables that influence the promotional results in the long
term.
Finally, a third group finds a positive relation between promotion and the consumer's loyalty
when it extends its study to the attitudinal component of this variable (Bawa and Shoemaker,
1987; Cotton and Babb, 1978; Lattin and Bucklin, 1989 ; Rothschild and Gaidis, 1981). These
authors affirm that, if the consumer has a great preference for the brand and sees the promotion as
a prize for his or her fidelity, the image of quality and satisfaction will be reinforced, leading to
an increase in the probability of choosing the brand, even after the offer has been withdrawn, thus
increasing/reinforcing the consumer's loyalty.
The current models that analyze consumer loyalty to tourism distribution agents propose
consider ing both the attitudinal and the behavioral components, although from a relational
marketing perspective they assign a fundamental role to the attitudinal component of loyalty.
These models have not incorporated sufficiently the impact of the consumer's perception of
prices on the formation of consumer loyalty to travel agents. Hanefors and Hossberg (1998)
analyze the importance of the information included in travel brochures throughout the different
decision processes in the consumer's purchase (before, during and after making the decision to
buy). However, the effect that bargains on advertised trips in the brochures has on the process of
deciding to buy is not sufficiently contrasted, particularly their effect on the tourist's post-
purchase behavior.
3. HYPOTHESES FOR THE STUDY
To analyze the formation of the tourist's loyalty to tourism distribution agents, both wholesale
(tour operator) and retail (travel agent), and the effect of price promotions for tourist packages on
the formation of loyalty, we propose a theoretical model that incorporates this variable in a
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schema generally accepted in the academic literature for analyzing the consumer's buying process
and the formation of consumer loyalty (Figure 1). In this schema, it is not common to integrate
the effect of perceived price or the influence that promotions have on this price.
Studies that analyze the relation between perceived quality, satisfaction and repetition of
purchase or retention of the consumer applied to the service sector find that the quality perceived
by the consumer is an antecedent to his or her level of satisfaction. This last variable affects the
consumer's intention to buy directly and positively (Berné, et al., 1996, 2001; Cronin and Taylor,
1992) and influences his or her level of loyalty, such that when the consumer is satisfied with the
purchase made, the probability of his or her becoming a loyal consumer increases.
Figure 1. The theoretical model of the effect of price promotions for combined trips on
consumer loyalty to tourism distribution agents.
When tourism distribution agents plan their commercial strategies, they pursue different tactical
and strategic objectives. The tour operator tries to maximize the benefits of its brand in the long
term, while the travel agency considers its main goal to be the maximization of the benefits of all
the alternatives commercialized in the commercial establishment (Karande and Kumar, 1995;
Kopalle, et al., 1999).
The ways to achieve both of these goals are related. On the one hand, the tour operator needs
support from the travel agency to inform the consumer properly and to stimulate sales of tourist
packages. On the other hand, for the travel agency to keep its clients loyal, clients must be
satisfied with the trip developed by the tour operator. Because of this relation of dependence, we
can expect that when a tourist is satisfied with a trip designed by a tour operator and acquired at a
travel agency, the probability of remaining loyal to both agents will increase. As a result, we form
the following hypothesis H1 for study:
H1: Satisfaction with the trip influences directly and positively the tourist's loyalty to tour
operator and travel agency.
Most of the scientific literature applied to the sector of mass consumption goods has found that
the impact of perceived quality on customer loyalty is produced indirectly through satisfaction.
However, the results differ when these studies are applied to service sectors, particularly to the
tourist market. Some studies applied to different tourist services obtain a direct, positive and
statistically significant relation between the perceived quality and the intent to buy (Cronin and
Taylor, 1992) or between perceived quality and the tourist's loyalty (Bigné, et al, 2000). They
also find that these effects are greater than the impact that satisfaction exercises on the behaviours
analyzed for purchase and repurchase (Baker and Crompton, 2000 and Campo, 2004). These
results support the proposal of Hypotheses H2(a-c) for study, which analyze the relation between
perceived quality, satisfaction and the tourist's loyalty to the agents that commercialize the tourist
package:
H2a: The quality of the tourist package as perceived by the tourist is a direct and positive
antecedent to satisfaction with the trip.
H2b: The quality of the tourist package as perceived by the tourist affects positively and directly
the loyalty to the agents that commercialize it.
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H2c: The magnitude of the effect that quality perceived by the tourist exercises on loyalty is
greater than that of the effect caused by the tourist's satisfaction with the trip.
The effect of price promotions on the formation of consumer loyalty has not been analyzed
sufficiently. The contradictory results lead us to affirm that no direct relation exists between price
promotions and consumer loyalty (Davis, et al., 1992; Ehrenberg, et al., 1994 and Neslin and
Shoemaker, 1989). On the contrary, we expect that the effect of price promotions for tourist
packages on loyalty to the agents is produced indirectly and depends on the sign and significance
of their influence on the variables that intervene in the process of the formation of loyalty.
Specifically, the sign of the indirect effect of the promotion obeys the quantity of the balance of
the effects exercised on perceived quality and satisfaction. On one hand, we expect that price
promotions affect satisfaction positively through the inverse relation between price and value
(Davis, et al., 1992). If it is active, this indirect component of the effect of price promotions on
loyalty will adopt a positive sign. On the other hand, evidence has been found that price
promotions affect negatively the evaluation of perceived quality and thus consumer satisfaction
(Dodson, et al., 1978; Guadagni and Little, 1983; Jones and Zufryden, 1980; Kopalle, et al.,
1999; Shoemaker and Shoaf, 1977). In this case, the sign of this component of indirect effect of
price promotions on loyalty to the agents that commercialize the tourist package is negative. The
sign and statistical significance of the net effect are conditioned by the intensity and magnitude
of the influence of the promotion on prices in each of the antecedents of tourist loyalty. These
findings indicate the need to propose a hypothesis for open study (H3a-c):
H3a: Price promotions of combined trips affect the tourist's loyalty to the tourism distribution
agents indirectly through their effect on perceived price, perceived quality and satisfaction.
H3b: Price promotions in combined trips affect positively the loyalty of the tourist to tourism
distribution agents when the size of their effect on satisfaction through value is greater than that
of their effect through perceived quality.
H3c: Price promotions of combined trips affect negatively the loyalty of the tourist to tourism
distribution agents when the size of their effect on satisfaction through value is less than that of
their effect through perceived quality.
4. METHODOLOGY OF THE STUDY
To contrast the theoretical model proposed and the hypotheses formulated, we carried out an
empirical investigation to study the purchasing behavior of a tourist package. The information
comes from a personal questionnaire performed on Spanish tourists who had travelled to
destinations in Central America, South America or the Caribbean in recent years. In addition, the
information obtained is selected and completed from brochures prepared by the tour operators
and available in travel agencies. Once incomplete questionnaires were eliminated, the sample
included reached 358. The information was gathered in public places where it was accessible to a
large number of individuals who fulfill the conditions required by the study. These places were:
Barajas Airport (Madrid, Spain) and different shopping centers (representative of the city of
Madrid). The study was developed during November and December 2003.
The constructs included in the theoretical model- loyalty to the tour operator, loyalty to the travel
agency and perceived quality-were measured by including multidimensional scales, while we
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measured the latent variables of satisfaction, perceived price and promotion using a
unidimensional scale.
To measure loyalty to the tour operator and the travel agencies, we followed the methodology
used by Butcher, Sparks and O'Callaghan (2001) and Oh (1999), which includes indicator
variables of behavioral loyalty (intention to return to acquire products from the same tour
operator/to travel with the same travel agency) and indicators of attitudinal loyalty
(recommendation of the tour operator/travel agency).
Both latent variables fulfill the conditions of reliability (Alpha and composite reliability
coefficient > 0.70) and validity of construct (extracted variance > 0.50; p < 0.001), which permits
us to accept them as measures of loyalty to the tour operator and travel agency (Table 1).
The perceived quality of the combined trip was measured from the weighted evaluation of the
components included in the tourist package and including variables indicative of the level of
good or bad reputation of the tour operator in the market. First, we should point out that the
percentage of variance of each indicator reflection included in the common factor of perceived
quality is low (Table 1). However, the condition of composite reliability is fulfilled, indicating
the appropriateness of treating the variables included in the construct together. On the other hand
all the coefficients of the indicators are significant at a level p>0.001, a condition necessary for
fulfilling convergent validity, which shows that the variables included are measures of the same
phenomenon. This does not occur with respect to the extracted variance, which shows a
coefficient lower than 0.5, but given the fact that the rest of the conditions are fulfilled and that
none of the tests suggests that the model would improve with the elimination of one indicator, the
construct was accepted as a measure of perceived quality of the combined trip.
Measurement of the tourist's satisfaction was performed by following the methodolo gy of Oh

(1999), Pedraja (1998) and Soderlund (1998), which indicates the tourist's degree of overall
satisfaction with the trip taken. The price perceived by the tourist refers to the price that he or she
remembers having paid for the trip (Pedraja, 1998), and the use of price promotions measures the
degree of purchase that the tourist made at a promotional price.
5. RESULTS
The empirical validation of the theoretical model presented was performed by applying a
structural equations methodology, using the statistics program EQS integrated into the statistical
package SAS V8.
Before forming the relation model, we performed a trial confirmatory factorial analysis that
enabled us to confirm the global fit of the model to the information analyzed. The models
analyzed, both that of the previously measured estimate and that of relation (Figure 2), fulfill the
indicators of goodness of fit, which enables us to affirm that they provide an excellent statistical
fit with the data. First, the value of c2 is not significant (p = 0.06), and the relation between c2 /gl
is equal to1.25 and lower than the critical value of 2 recommended by Bentler (1989). Second,
the indicators of global fit proposed by Bentler (1989) and Bentler and Bonnett (1980), present
values close to the unit (BCFI = 0.99; BBNNI = 0.99 y BBNI = 0.96).
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The results of the relation model (Figure 2) show first a high, positive and significant (p<0.001)
relation between the tourist's loyalty to the tour operator and his or her level of loyalty to the
travel agency, loyalty to the tour operator being an antecedent to loyalty to the travel agency.
Further, we confirm that when the consumer values positively the quality of the service received
and is satisfied with the trip taken, the probability of becoming loyal to the tour operator and thus
to the travel agency that contracted the trip increases.
It is important to point out that in this model we have not found a direct and significant relation
between satisfaction, perceived quality and loyalty to the travel agency, since the relation just
mentioned is indirect. Thus for travel agencies to obtain loyal consumers, it is not enough to offer
excellent service. It is a necessary condition for these agents to work with tour operators that have
loyal clients, operators associated with high quality and fulfillment of the consumer's
expectations.
Second, the perceived quality for this product category is an antecedent of satisfaction, which
contributes directly, positively, and significantly to the generation of loyalty to the tour operator.
The relation between satisfaction and loyalty to the tour operator is also direct, significant and
positive, but with a lower coefficient than the former. Thus we can affirm that the key to
achieving both the tourist's satisfaction with the combined trip and the consumer's loyalty to the
tour operator and thus to the travel agency lies in providing high levels of perceived quality in the
service. In fact, improving one point in the tourist's perception of overall quality generates an
increase in satisfaction of 0.55 points, an increase in loyalty to the tour operator of 0.86 points
(0.74 through a direct effect, and 0.12 through an indirect effect) and an increase in loyalty to the
travel agency of 0.55 points.
The effect of promotions for tourist trips on the formation of loyalty to the tour operator and the
travel agency is indirect. It is not confirmed that price bargains erode the consumer's level of
loyalty directly. The indirect effect on loyalty of the degree of utilization of price promotions in
on the part of the tourist depends on the variables that precede the formation of the consumer's
loyalty. Specifically, it depends on the impact exercised by promotions on the formation of the
perceived price and of perceived price on the consumer's satisfaction. However, the results
obtained show that we only find a statistically significant effect through the component that acts
on the chain of relations between price, perceived quality and satisfaction. Thus the sign of the
net effect of price promotions on loyalty of the agents that distribute tourist packages is negative,
although small in size.
Essentially, the results indicate that promotions affect directly, negatively and significantly
(p<0.001) the formation of the perceived price. The impact of the utilization of the promotion on
satisfaction is indirect. On the one hand, the perceived price intervenes significantly as an
external indicator of perceived quality, while it does not affect the perception of the value of the
combined trip significantly. Thus, the only indirect and significant effect of the utilization of the
promotion on satisfaction has a negative sign through its influence on perceived price as an
indicator of quality.
As a result, the statistically significant relation between degree of utilization of the price
promotions and the tourist's loyalty to the agents has an indirect and negative character, such that
the increase of one point in the degree of utilization of the promotions causes a decrease of 0.06
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points in the probability that the tourist will remain loyal to the tour operator and a decrease of
0.04 points that the tourist remain loyal to the travel agency. In contrast, the indirect effect of
promotions on the consumer's loyalty to the agents through the direct relation between perceived
price and satisfaction is not significant (t = -1.29), although it has the sign expected.
The results obtained permit us to confirm partially or totally each of the hypotheses formulated.
H1 is verified in relation to the tour operator. In relation to the travel agency we confirm the sign
and significance of the effect of satisfaction, not as direct but as indirect, requiring the
intervention of loyalty to the tour operator as antecedent. H2a and H2c are verified completely,
since perceived quality acts as an antecedent to satisfaction and its total effect on loyalty to the
agents is greater than that caused by satisfaction. H2b is partially verified in a way parallel to the
verification of H1. Here, perceived qua lity influences loyalty to the tour operator positively and
directly, but its effect on loyalty to the travel agency is positive and indirect. Finally, Hypothesis
H3 is fulfilled, since price promotions only affect loyalty to the agents indirectly. In this
particular case the sign of the effect is negative, verifying H3c.
As a result, we conclude that price promotions do not have a direct effect on the consumer's
loyalty but rather an indirect effect with negative sign and low intensity. The key to obtaining
loyal consumers through commercial policy lies more in supporting and offering a service of
excellent quality than in the reduction of prices, since obtaining a high level of consumer
guarantees satisfaction.
6. CONCLUSIONS, LIMITATIONS AND FUTURE LINES OF RESEARCH
The results obtained have important implications both from the theoretical point of view and in
commercial decision-making on the part of tourism distribution agents.
We have first analyzed the formation of the tourist's loyalty to tourism distribution agents (tour
operator and travel agency). The studies that focus on the tourism sector and that analyze
consumer loyalty usually focus on providers of the service (airline companies, hotels, restaurants,
etc.), while few studies apply to those responsible for the distribution and incorporate the relation
between the manufacturer (tour operator) and the distributor (travel agency) into their analyses.
This study is of prime utility for understanding the relation of dependence between the agents and
understanding the variables that influence the tourist's loyalty.
Second, we incorporate the effect of perceived price and of the tourist's use of price promotions
in the schema for formation of loyalty, which helps us to understand the effect that price
promotions exercise on business results in the long term. The evidence shown concerning the
kind of effect exercised by promotions for tourist packages at prices advantageous to the
consumer is consistent with the limited results that can be found in the previous literature and
leads us to affirm that these promotions do not erode the consumer's loyalty directly. Price
promotions diminish the tourist's loyalty to tourism distribution agents through the perceived
price-quality relation, while we do not detect a clear positive effect through the price-value
relation due to the existence of a non-significant relation between the variables of perceived price
and satisfaction.
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From the point of view of managerial implications, this study will help tour operators and travel
agencies to understand the variables that contribute to the generation of loyalty among their
consumers and to manage their commercial policies properly in order to maximize their profits
long term. The results obtained show a positive and significant relation between the consumer's
loyalty to the tour operator and his or her level of loyalty to the travel agency, the former
preceding the latter. This relation indicates that there is dependence between the results obtained
by both agents. Thus, for both to maximize their business profits, they should coordinate
management of their commercial policies. Second ly, our results indicate that the key to enabling
tour operators and travel agencies to obtain loyal consumers lies more in offering trips that
provide a high quality of service than in offering prices advantageous to the consumer. The
tourist's evaluation of the quality of service is the variable with the greatest positive influence,
both direct and indirect (through satisfaction) on loyalty to the tour operator and thus on loyalty
to the travel agency. Finally, although the effect of price promotions on loyalty is indirect and
low in quantity, it is negative and depends on the tourist's evaluation of the trip acquired and his
or her level of satisfaction. Thus, agencies that usually use promotional tools to stimulate sales
should be knowledgeable about the levels of the tourist's evaluation of service and the evolution
of these perceptions.
In this study, we were not able to contrast the positive effect of promotions on loyalty due to the
non-significant relation between the variables of perceived monetary price and satisfaction. One
possible explanation for this non-significant relation could be the nonlinear relation between both
variables. A good number of indices suggest that decreases in price cause an increase in customer
satisfaction up to a level of price close to the acceptable price. Above this point, decreases in
price are related to lower satisfaction because the price of the t rip would become an unfavourable
sign of the level of the service he or she wishes to receive. These findings advise us that future
studies should analyze the effect of promotions on loyalty, introducing nonlinear components into
the variables considered.
This research analyzes a dynamic phenomenon in a static form. Therefore, it is not exempt from
some problems of measurement. Analysis of the latent variable "perceived quality in the
combined trip" has been performed by means of scales that incorporate different magnitudes of
measurement. Although the indicators of reliability and validity surpass the minimum values
recommended for accepting the variable as a measure of the phenomenon studied, future research
is needed to improve the measurement of this variable and to extend the study to longer periods
of time.
Finally, the results found in the literature analyzing the long term effect of price promotions
suggest that this effect varies as a function of the group of consumers analyzed (Blattberg and
Sen, 1974, 1976; Guadagni and Little, 1983 and Eskin and Baron, 1977). Thus it is especially
important to extend this study by incorporating variables that moderate the effect of the
promotions, such as the consumer's sensitivity to price or level of loyalty to the agents, and to
expand the analysis to other agents of tourism commercialization and other categories of tourism
products.
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THE TRAVEL AGENCY
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THE TRAVEL AGENCY
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THE TRAVEL AGENCY
TABLES
Table 1. Measurement of the latent variables

Latent variable Li Ei Reliability Validity
Indicator Composite Variance Convergent
reliability reliability extracted validity
Travel agency loyalty: Degree of agreement
with the following affirmation: (Scale of 1-10.
Strongly Disagree/strongly agree)
- “I would feel completely comfortable travelling
0,87 0,21 R2 = 0,79 t = 18,27
again with the same travel agency”
- “I would travel aga in with the same travel Alpha = 0,89 0,70
agency even though they changed tour operators” 0,72 0,48 R2 = 0,52 F.com = 0,87 t = 13,19
- “If anyone asks for a recommendation, I would
recommend travelling with this travel agency” 0,89 0,20 R2 = 0,80 ---
Tour operator loyalty: Degree of agreement
with the following affirmation: (Scale of 1-10.
Strongly Disagree/strongly agree) Alpha = 0,84
- “I would feel completely comfortable travelling
0,73 0,25 R2 = 0,75 F.com = 0,80 0,66 t = 15,34
again with the same tour op erator”
- “If anyone asks for a recommendation, I would
recommend travelling with this tour operator” 0,81 0,35 R2 = 0,65 ---
Perceived quality: (Scale 1-10)
- Importance*Score of quality of airline 0,54 0,70 R2 = 0,30 t = 9,59
- Importance*Score of quality of the hotel 0,57 0,67 R2 = 0,33 t = 8,87
- Importance*Score of the organization
0,57 0,68 R2 = 0,32 t = 8,93
- Importance*Score of guaranties included
- Importance*Score of quality of the tour 0,63 0,61 R2 = 0,39 t = 9,74
operator
- Importance*Score of quality of the travel 0,73 0,47 R2 = 0,53 Alpha = 0,77 0,32 ---
agency F.com = 0,79
- Degree of agreement with the following 0,53 0,71 R2 = 0,29 t = 11,83
affirmation: (Strongly Disagree/strongly agree)
“The tour operator with whom I travelled is 0,33 0,89 R2 = 0,11 t = 5,33
known in the market”
“The tour operator with whom I travelled has a
0,55 0,70 R2 = 0,30 t = 8,54
good reputation in the market”
Li : Standardized loading
Ei = (1- R2 ): Error variante
14
THE TRAVEL AGENCY
FIGURES
Figure 1
Theoretical model of the effect of price promotions on consumer loyalty towards a tour
operator and travel agency
Perceived
quality H2b(+)
H3(+/-)
+ H 2a(+) H 2b(+)
Promotion
Perceived - Tour
price operator
- Satisfaction
H 1(+) loyalty
H 1(+) +
Indirect effect
Direct effect Travel
agency
loyalty
Figure 2. Relationship model of the effect of price promotions on consumer loyalty towards a
tour operator and travel agency
Perceived
quality
0,74**
0,18*
0,98
0,55**
Perceived D3
Tour
Promotion 0,49
D2
price Satisfaction operator
-0,40** - 0,06 0,21**
loyalty
0,84
0,91
E6
E15
List of Items for each latent variable: 0,64**
Satisfaction (Strongly disagree/strongly agree. Scale of 1-10)
- Degree of satisfaction with the trip taken Travel 0,76
Perceived price (€) ** p<0,001; * p<0,01 D1
agency
-Price that the consumer states having paid for the trip ? 2 = 110,11; gl = 88; p = 0,06; ? 2/gl <2
BCFI = 0,99; BBNNI = 0,99; BBNI = 0,96 loyalty
Promotion (Low /high. Scale of 1-10)
-Degree of purchase of the tourist packages at promotional prices
15
RETAIL PRICE DISPERSION: SPATIAL AND VERTICAL COMPETITION ANALYSIS
RETAIL PRICE DISPERSION: SPATIAL AND

VERTICAL COMPETITION ANALYSIS
IGNACIO CRUZ ROCHE

JAVIER O UBIÑA BARBOLLA
1
M ª JESÜS YAGÜE GUILLÉN
ABSTRACT
This study analyses the effect that competition has on the dispersion of retail prices for
products of mass consumption. We propose a model that integrates vertical, spatial,
environmental, and entrepreneurial result factors that shape the competitive structure of the
commercial retail sector in Spain. The results obtained show that various indicators from
these four levels of competition exert a decisive influence on the price levels of the products
analysed in the different points of sale considered. The study also enables us to confirm that
significant differences exist in the effect of the factors analysed on price dispersion, depending
on the category of products considered (packaged goods vs. fresh foods).
.
KEY WORD
Price, competition, distribution, retail
1
Cantoblanco, Ctra. de Colmenar Viejo, km. 15, 28049 Madrid. Spain. E- mail: ignacio.cruz@uam.es, maria.yague@uam.es,
javier.oubinna@uam.es. Tel: (34) 914974873/8669/3551/
16
1. INTRODUCTION
The modernization of distribution in Spain has been especially intense and rapid, changing in two
decades from distribution based on the predominance of traditional commerce to the
implementation of modern chains of hypermarkets and supermarkets with a strong presence of
foreign capital. This consolidation of large -scale distribution has meant considerable increases in
the levels of concentration in the retail step of the channels of commercialization (Cruz et al.,
1999), which in some cases has sparked intense debate on competition levels in the sector.
Retail prices can be affected by this new context, since the changes occurring in the vertical and
horizontal competition in the channels can cause price levels to vary from one zone to another as
a function of the competitive characteristics of each geographical context and product. It is thus
necessary to analy ze the price policies in retail commerce and determine the effect of the current
competitive structure on the price differences between points of sale.
This analysis requires considering another of the important changes taking place in the
commercial structure, that is, the different penetration of different retail formats in each of the
main categories of products of mass consumption. Currently in Spain, self-service retail
establishments have a share of 85% in the category of packaged and non-perishable products. The
remaining 15% is held by retailers who sell in the traditional way. In contrast, the market
participation of free service establishments in the category of fresh and perishable products does
not exceed 45% (A.C. Nielsen, Annuary 2001). At the same time, we should point out that the
price policies applied by different retail formats vary consid erable from one product category to
another, as can be seen from Table 1, which we constructed from information provided by the
Ministry of Industry, Tourism and Commerce in Spain (Internal sources, 2003).
Important publications on the international level that have studied the relation between the cost of
acquiring fresh products and the levels of retail prices observe that retail firms introduce
considerable price variations in their products independently of the cost of supply (Criner and
McLaughlin, 1997). Other studies, like that of Farhangmehr, Marques and Silva (2001), have
analysed the impact caused by the growth of the hypermarket format in the sector of products of
mass consumption from the double perspective of the threat they present for traditio nal
commerce and of their appropriateness to consumers' new shopping habits. González-Benito,
Muñoz and Kopalle (2005) show the presence of a higher degree of intratype spatial competition
than intertype, corroborating a hierarchical organization when cons umers choose a commercial
establishment, in the sense that they first choose the commercial format and then a particular
ensena within it.
However, until now no one has studied whether the different phase of the life cycle in which free
service formats find themselves in the commercialization of fresh and packaged products
(introductory phase for the former and mature phase for the latter) and the different price policies
developed by different commercial formats in each product category cause the price dispersion
analysed for categories of fresh products to fit an empirical model different from the model that
represents the phenomenon for categories of packaged products.
17
The goal of this study will thus be twofold. On the one hand, it will estimate the effect that the
different factors composing the competitive structure of retail commerce have on the dispersion
observed in the price levels at different points of sale. Until how, the effect of many variables of
vertical and horizontal competition on the channels of distribution has been analyzed only
partially. No global model has been proposed to combine the effects of each competition
indicator on these two levels and the factors of environment and of competitive strategy of
distribution chains themselves on the Spanish market for products of mass consumption.
On the other hand, we try to analyze whether or not the behavior of the explanatory variables of
territorial price differences is similar for the categories of packaged and fresh products in order to
confirm whether, in fact, the differentiating characteristics of these two large categories introduce
changes in the behavior of the explanatory variables of the dispersion of retail prices.
2. CONCEPTUAL FRAMEWORK AND HYPOTHESES

From the perspective of horizontal competition, empirical studies that have adopted the paradigm
of industrial organization to contrast the effect exerted by the processes of retail concentration on
results conclude that the price differences observed over different geographical markets vary with
the competitive intensity of each territorial market (Lamm 1981, Marion et. al. 1979, Cotterill
1986 and 1999, Yagüe 1995, Aalto-Setälä 2002). The studies performed from the perspective of
vertical competition have estimated the degree to which the differences in benefit margins
measured in different categories of commercial products obey the differences of competitive
intensity and of power relations in each distribution channel (Ailawadi et al. 1995, Binkley and
Connor 1998, Méndez and Yagüe 1999).
Developing a model that integrates the effects of the process of retail concentration on the two
axes of competition, vertical and horizontal, in which their impact on consumers' local choices is
shown, requires replacing the traditional "one-stage" economic model with "a two-stage" model
like that Steiner (1991) proposes. This model takes into account the double role that retailers
perform for the manufacturers as clients of their products and as providers of segments of
demand or consumers (Mulhern and Leone 1999). The "two-stage" model proposed by Steiner
(1991) considers the coexistence of "intrabrand" (between manufacturers and retailers) and
"interbrand" (between manufacturers) competition and enables us to overcome the main
theoretical deficiencies of the "one-stage" model.
2.1 Horizontal competition and price level

For an individual retail establishment, the relevant competitive conditions are circumscribed by
the local environment, since the retail markets are spatially limited by the desire and capacity of
consumers to move from one place to another in order to shop. In fact, the market area for
retailers differs fundamentally from that for manufacturers, since the former operate in local
markets, while the latter operate in national or international markets, producing goods with
national, international or global demand (Yagüe 1995, Dobson and Waterson 1996). This
localised competition offers the retailers an excellent position for exerting market power on some
spatially limited consumers. The a priori theoretical relation between horizontal competition and
prices thus implies that a higher the degree of spatial competition should cause a decrease in the
price levels.
18
This theoretical relation proposed in general terms can be broken down in different ways
according to the specific kind of factor of horizontal competition to be analy zed. A prime factor
that must be considered is the level of entrepreneurial concentration in the retail sector studied.
The different theories of oligopolistic competition agree in showing a positive relation between
prices, price/cost margins and concentration (Lamm, 1981). However, both the theoretical models
of competition and the studies based on the paradigm of industrial organization recognize that the
increases in concentration can also generate the use of economies of cost (scale, experience,
span), and that their effect on prices could come to compensate or surpass that caused by the
exercise of market power (Demsetz 1973, Peltzman 1977). However, since the first effect
described is more common, we can propose the following hypothesis on horizontal competition
and the specific effect of the factor of concentration:
H-1: The higher the degree of market concentration, the higher the price levels at the point
of sale.
The size of the commercial establishments competing in the zone should be translated into the
execution of economies of scale and should thus have an inverse effect on prices, facilitating the
fixing of more competitive prices as the economies derived from the higher scale of operation
increase. Voss and Seiders (2003) have shown that the size of the commercial retail establishment
affects the promotional strategies of price they develop. We can thus formulate the following
hypothesis:
H-2: The greater the size of the establishments in a market, the lower the price level at the
point of sale.
The territorial structure of retail commerce for types of commercial format is related to the
importance that different models of competition have in each area of the market, such that a
higher presence of small formats reflects the existence of a model of competition based not on
price but on differentiation in the services offered, particularly those of proximity and
convenience. We can thus expect the prices in these formats to be higher than in formats of mass
dimension. Although this reasoning is valid for packaged products, in which large formats have a
recognized efficiency, we must remember that in the case of fresh products these commercial
formulas still represent a small percentage of the market and thus do not obtain the same
advantages in acquisition costs that the categories of packaged products achieve. Further, their
sale regimen ill-adapted in its origin to the commercialization of these product categories (more
intensive in services and characterized by high expiration rates) can cause some diseconomies
and a positive effect on the price levels. We must distinguish in this case between two different
hypotheses:
H-3a: In categories of packaged products, the greater the dimension of the commercial
formats, the lower the price level.
H-3b: In categories of fresh products, the greater the dimension of the commercial
formats, the higher the price level.
On the other hand, it is clear that not all commercial formats have the same prestige based on the
general confidence and image their corresponding commercial ensenas convey, and this factor
19
can logically have a strong influence on the final price levels. In theory, we can expect that the
commercial chains in specific territorial areas of maximum prestige and image of their ensenas??
establish higher prices when they address the differentiated demand of some loyal segments of
homes. The hypothesis to propose in this case would be:
H-4: The greater the reputation of the commercial establishment, the higher the price
level.
Another of the aspects that condition the degree of competition that we have not yet incorporated
into the analysis of retail price levels is that of multimarket competition. This is reflected by the
number of multimarket contacts of firms located in a specific market but that also compete in a
number of other markets.
The studies of this problem (Jayachandran et al., 1999; Evan and Kesides, 1994; Fernández and
Marín, 1998) hold that in those markets in which firms have a greater number of multimarket
contacts outside the market, the degree of competition decreases due to two basic processes. First,
when one firm must compete with another in many other markets, it will have some fear of the
other firm's retaliation in these other markets if the first firm decides to undertake some kind of
competitive action in the first market.
A second issue that supports this proposal of lower competition derived from the greater number
of firms' multimarket contacts is that the firms competing in many markets end up generating a
feeling of "shared patience." Shared patience causes a higher frequency of collusory agreements
among these firms, which logically causes an elevation in the price le vels in the markets in which
these firms have contacts.
However, it is possible to include the total effects of concentration and multimarket contacts to
confirm whether the individual effects of these variables are overestimated to some extent. In the
case that some overvaluation in fact exists, the expected effect would be negative. We should
thus formulate two hypotheses:
H-5: The greater the multimarket competition, the higher the price level.
H-6: The greater the overvaluation of the individual effects of multimarket competition
and of concentration, the lower the price level.
2.2. Vertical competition and price level
The power exerted vertically by large retailers serves them individually to assure that they remain
competitive against other retailers in the different commercial areas in which each of their
commercial establishments compete. The result is that for a given area a few establishments
belonging to powerful retail chains and possessing similar economies of cost, price competition
will be more apparent than real, preserving a policy of high prices and benefits. Lamm (1981),
Marion et al.(1979), Cotterill (1986, 1999) confirm this evidence.
20
In contrast, if there are few establishments in a commercial area but only one belongs to a large
retail chain that can wield vertical power and use economies of cost and that has as its goal to
displace or eliminate the competition of the other retailers, it will opt for transferring the benefits
of exercising its vertical power to achieve its goal, in order to raise prices later.
For a specific degree of spatial retail competition in those categories in which manufacturers of
leading brands have greater negotiating power, manufacturers will tend to fix higher prices,
especially in establishments belonging to retail firms with less relative power.
The prices of leading manufacturer brands with greater relative negotiating power can thus reach
exceptionally high shares in those markets where retailers do not have to endure intense local
competition, since here it will be possible to transfer the greater cost of acquisition of products to
the consumers. We can thus formulate the following hypothesis:
H-7: The greater the relative power of the manufacturer with respect to the distributor, the
higher the price level.
On the other hand, if the increase in vertical market share of the retailers reflects their relative
power over the manufacturers, distributor brands become a vehicle for the exercise of power. To
the extent that these acquire "brand" status in their own right, they reinforce the retailer's power
not only against the manufacturers but also against other retailers in a given locality or
commercial area. The competitive position of the distributor brand, reflected by its market
participation, thus gives the retailer specific market power that it can use to its advantage.
There is an intense controversy as to whether the greater market participation of the distributor
brand causes a reduction of price in the manufacturer brand (Narasimhan and Wilcox, 1998) or
whether, on the contrary, it increases price on some occasions (Hoch, 1996). Sivakumar (1999)
shows the importance of the competition between brands situated in high quality lines and brands
with lower levels of quality.
Usually, if one deals in leading brands or manufacturer brands that have at least a quality superior
to that of the distributor, the retailer will be interested in expanding the price differential to
improve the competitive position of the distributor brand and in enhancing if possible the
perception of the quality differential.
H-8: The greater the market participation of the distributor brand, the higher the price
level of the manufacturer brand.
On the other hand, the backward- looking vertical integration in the channel on the part of retail
distributors places them in a situation in which they can benefit from some better conditions for
the purchase of products. This advantage in acquisition costs can be translated into final prices if
the spatial competition requires it. We can thus formulate the following hypothesis:
H-9: The greater the backward- looking vertical integration of the channel on the part of
the distributor, the lower the price level.
21
2.3. Environment and price level

In addition to the factors of vertical and horizontal competition in the distribution channels, there
is no doubt that another series of issues related to the general environment of retail markets also
conditions final price levels, among which we would emphasize factors of demand, such as the
acquisitive capacity of consumers from specific zones of the market, which retailers use to raise
prices; or the specific location of certain markets farther from the places of production that
involve greater logistical charges of supply and that thus affect the retailers' final prices.
H-10: The greater demand potential of a product, the higher the price level.
H-11: The greater the distance between the products' points of sale and their places of
origin, the higher the price level.
2.4. Retail competitive strategy and price level
An accurate analysis of retail prices requires including variables of entrepreneurial conduct that
reflect competitive strategies based on advantages of efficiency, differentiation and specialisation
applied by the decision centers of the distribution firms, Porter (1980).
In theory, the main course of differentiation used by retailers is limited to the level of service
offered to the clients. Even if the service can be evaluated in relation to different indicators like
extent and depth of the variety offered, retail firms positioned in a greater level of service clearly
must have higher personnel costs that will ultimately be transferred to prices.
On the other hand, some retail firms compete fundamentally through efficient management of the
business, whether in operative terms or in terms of general entrepreneurial efficiency. In this
case, we can logically expect some lower final sale prices. The hypothesis we propose is thus as
follows:
H-12: Firms with competitive strategies based on advantages of cost will fix prices lower
than those that compete with strategies based on differentiation.
3. METHODOLOGY
Based on the definition of the conceptual frame constructed above from the literature review and
on the formulation of the corresponding hypotheses, we are in a position to propose the following
explanatory model for price levels:
P = f ( CH, CV, CE, EC)
In this model, prices (P) are a function of horizontal competition (CH), vertical competition (CV),
environmental conditions of the market area of each city (CE) and account results of the retail
firms that intervene in the market and of the retailers' competitive strategies (EC). To make the
proposed model and the formulated hypotheses operative, we develop a combination of indicators
from the information available for evaluating both the dependent variable and the explanatory
factors.
Price is logically the dependent variable in the models. The specific explanatory variables
belonging to each of the factors, as well as the hypotheses on which the model is based,
22
formulated using the sign expected from the effect of each explanatory variable on the price
levels are represented in Table 2. As can be seen, the table proposes a high number of relations
between the explanatory variables and the variable of price. Among these, a considerable group is
supported by previous theoretical and empirical arguments and proposes an effect of each factor
on the price with unequivocal sign. Further, we have included some relations where the sign
expected for the effect is ambiguous, since the results obtained in previous studies are not
conclusive because the effect analyzed depends on the category of products analyzed.
To contrast this model, we used a database of products of mass consumption furnished by OCU
(Organization of Consumers y Users). This database gathers information for the year 2000 on the
sale of many leading brands in the categories of food, personal care and housecleaning over sale
areas in the free service regimen. Because the dependent variable "sale price" figured in the
database in absolute monetary terms, we have transformed it so that intercategory differences in
the average price levels do not distort the results of the analysis. The standardized values of the
transformed variable follow a distribution N (0.1).
Table 3 presents the measurement of the dependent and independent variables included in this
analysis, as well as the information sources through which we developed the different indicators.
Alimarket, A. C. Nielsen and IRI (International Research Institute) are the three most prestigious
institutions in Spain in the development of reliable statistics related to the sector of products of
mass consumption. The Economic Annuary of the Caixa is backed by some of the leading
finance corporations in the Spanish financial sector, and the Centre for the Analysis of Balances
gathers information from all the account results deposited in the Registries of Commerce for all
the distribution firms operating in Spain.
Given that one of the fundamental goals of this study is to analyze the possible differences
between packaged and fresh products, we constructed two databases, one for each kind of
product, and thus also ultimately constructed two explanatory models for price levels, one
relating to packaged products and the other to fresh.
The model for packaged or non-perishable products includes information on food products
(packaged) and drinks, personal care and housecleaning. After filtering the information included
in the database and analyzing its compatibility with other information sources needed to perform
the study, we chose 42 brands representative of a number of other product categories. Given that
the database offers information on sale prices in different retail establishments for each of the
products analyzed, the total number of registries (product-establishment) included in the database
is 19.991. We must take into account that not all the brands are sold in all the commercial
establishments.
The model for fresh products analyzed specifically products in categories of fresh food and thus
includes data on vegetables, fruit, fish and meat that fulfill the requirement of freshness. The
variable in this model is not the price of the leading brand, but the average price of the product
category, taking into account that in this case we considered 42 product categories and that the
total number of Registries reaches 9,896 observations.
23
To contrast the proposed hypotheses, we used the statistical technique of multiple step or "step-
wise" regression, given that the linear relations proposed in the signs expected for the effect of
each explanatory variable on the prices is perfectly adapted to the characteristics of this
technique.
4. RESULTS
4.1. Model of packaged or non-perishable products
The results obtained in estimating the equation of prices appear in Table 4. We propose a
multiple regression model to explain the price variable. It has acceptable explanatory power for
the wide database manipulated (R2 corrected = 16%) and an F of Snedecor of 209.09, which
implies a significance level of p<0.000. The sign and statistical significance of the coefficients
estimated for the different variables of horizontal competition correspond to those expected. We
can thus conclude that the local prices of leading brands are higher where there is greater
concentration and differentiation of the commercial structure and lower when the commercial
structure has a greater presence of hypermarkets and supermarkets and when the points of sale
can benefit from the effects of economies of scale. Therefore, hypothesis 1, 2, 3a and 4 are
confirmed.
Multimarket competition causes a decrease in rivalry, which causes an increase in prices in cities
where a greater number of firms with high rates of multimarket contacts in other places compete.
Consequently, hypothesis 5 is verified, and hypothesis 6 is also confirmed because the combined
effect of multimarket competition and levels of entrepreneurial concentration present the negative
sign found in other studies, which shows that the individual choice of each of these variables has
been overevaluated. Thus, even if it is true that concentration means market power and increase
in price levels and that multimarket contacts cause a certain measure of collusory practices with
the competition, it is no less true that both variables include to some extent combined effects.
As to vertical competition, in categories in which the manufacturers have greater relative

negotiating power, the prices of leading brands are higher due to the non-competitive action of
retailers. The absence of local competition enables the retailers to transfer to the consumer the
effect that the greater power of the manufacturers has on their buying costs. On the other hand,
the positive and significant sign of the coefficient estimated for the penetration of the distributor
brand means that the distributors increase the price of leading brands more in the categories in
which their own brands can obtain a better competitive position. Then, Hypothesis 7 and 8 are
confirmed, but vertical integration has not a significant effect on price, so hypothesis 9 is refused.
The characteristics of commercial equipment in the city also affect price level. In the Canary
Islands, prices are higher because the greater costs of transport are not compensated by a lower
tax on consumption. Then, hypothesis 11 is verified. On the other hand, in the cities with higher
income levels, the prices of leading brands are higher than in cities with lower income levels, as
was expected. The variation in sales in the channel has a positive effect, showing that in those
channels where sale of the product analyzed has increased in the past year, prices tend to rise,
while the negative evolution of demand causes a reduction in price levels. The rate of regional
consumption in turn shows a negative effect different from that expected, but we must take into
24
account that what we find in this case is most likely an effect of the elasticity of demand.
Therefore, in general, hypothesis 10 is verified.
Finally, hypothesis 12 is confirmed because we should point out that retail establishments with
lower efficiency in operative management have transferred their higher costs to consumers by
fixing higher prices for the leading brands, as the positive and significant sign of the variables of
unitary administration costs indicates. Specifically, operating costs lead the prices of sale to the
public to rise in the case of firms that are less efficient in the management of their operations in
administrative terms and that therefore transfer the increase in management cost to sale prices.
4.2. Model for fresh products

Table 5 presents the results obtained in the explanatory model for prices levels for the case of
fresh products. The explana tory power of the model in terms of variance explained is reduced
(R2=0.11), but again, we must consider the high number of observations with which the model
works. The F of Snedecor of the model equals 131.417 with a high significance level of p<0.000.
In the model, we can see how both the large supermarket and the hypermarket formats show a
positive effect on prices, contrary to the effect found in the model for packaged products. This
fact has already been predicted by hypothesis 3b, since this type of establishment is in a different
phase of the life cycle with respect to specialized commerce in the distribution of fresh products.
This kind of establishment, which achieves large economies of scale in the case of packaged
products, could encounter serio us difficulties in adapting to the commercialization of fresh
products, since the intrinsic characteristics of this kind of product require much more specialized
service, making it difficult to obtain advantages of cost derived from the size and self-service
regimen. In this case, this kind of format would have to give much better service, incurring
greater labor costs and having in many cases to package the fresh products, which ultimately
creates higher costs that end up being translated into higher prices vis à vis self-service
establishments with smaller surface, as in the case of small and medium-sized supermarkets.
In this model, hypothesis 5 is confirmed because multimarket competition also continues to

present a positive effect on price levels. This shows once again that, in those zones where
distribution groups that also participate in many other markets compete, competition levels are
reduced due to the two motives indicated in the theory, fear of retaliation in other shared markets
and the possibility that for greater collusory agreements due the effect of "mutual patience" on
relations between these retail distribution groups.
For its part, the IFA buying centre presents a statistically significant and positive effect on prices
(we recall that, along with Euromadi, IFA is the most important buying centre operating in Spain.
Both centers together, according to data from A. C. Nielsen, absorb some 90% of retail sales),
thus causing higher final prices with respect to retailers that work in Euromadi, the other major
buying centre in Spain, and in those that operate independently. The reason for this effect is that
the IFA centre does not deal in fresh products, and thus the retailers associated with this centre do
not achieve economies of purchase in these products, which is reflected in higher final prices.
Then, hypothesis 9 is verified in this model of fresh products.
25
The demand variable of income level shows the sign expected, since retailers take advantage of
greater acquisitive capacity in the province to fix higher prices on fresh products. The
establishments located in the Canary Islands, like those in the previous model for packaged
products, reflect higher logistical costs in their prices. Consequently, hypothesis 10 and 11 are
confirmed.
With respect to all the variables of competitive strategy, we can see that in this case none enters
into the model proposed for fresh products. Therefore, hypothesis 12 can be rejected, and we can
thus determine that the very slight relative relevance of these products relative to many other
categories still keeps variables of competitive retail strategy from playing a sufficiently
influential role on price levels in these markets.
In contrast, these products do continue to have considerable influence, according to the sign
indicated by the theory, the average size of the point of sale that presents a negative effect on
price levels due to the use of economies of scale, then, hypothesis 2 is verified. In contrast, the
service offered by chains with a good reputation presents a logically higher effect, maximum in
this kind of products for those where the market especially values the service received, then
hypothesis 4 is also verified. The hypothesis 1 and 6 are not confirmed, and hypothesis 7 and 8
could not be studied in the model of fresh products.
5. CONCLUSIONS
This study helps to explain the price differences between Spanish cities. It shows the implications
of horizontal and vertical market power on price formation, which constitutes an element of
reference for the regulation policies of the authorities responsible for competition. In this sense,
the study can contribute to improving the buying processes of consumers in local markets and to
giving greater control of the processes of concentration in retail markets and of power relations in
the distribution channels.
The study shows the effects of different variables of horizontal and vertical competition, as well
as variables of supply and demand belonging to each market and indicators of the competitive
strategies of the distribution groups, on retail price levels and thus makes it possible to confirm
the effect of all these factors in a single global model of action.
We include new variables that have not been used before to explain the retail price dispersions of
products of mass consumption, as is the case in multimarket competition. The results obtained
show the significant effect of this variable, demonstrating that the existence of large distribution
groups with a presence in different geographical zones can give rise to collusory agreements due
to a reduction in the competition levels, which results in higher price levels.
We have also observed how some explanatory variables of price level behave differently
depending on the kind of product cons idered. More specifically, we were able to confirm that
packaged products exhibit considerably different behaviour than fresh products. We can attribute
these differences fundamentally to the different intrinsic characteristics of each kind of product as
well as to the different structures of their respective distribution circuits, with a high (moderate)
penetration of packaged products (fresh) in establishments that sell in a self-service regimen. This
26
information also suggests that both classes of product are in a different stage of the life cycle in
their respective retail markets. Structural variables of the market such as retail formats thus
present apparently opposed behaviour in each of the two kinds of products of mass consumption.
The main limitation of the study stems from the fact that the determination coefficient of the
multiple regression model employed to contrast the hypotheses shows a value that is still reduced.
This indicates that a high percentage of variance is still unexplained. It is thus necessary to
introduce new explanatory factors in subsequent studies. It is possible that the addition of more
microeconomics variables of geographical or spatial section to the model would contribute to a
better explanation of the differences between product categories and territorial zones.
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29
TABLES
Table 1. Price level by type of establishment (index data for the year 2003)
Type of establishment Fruits and vegetables Fish Meat Packaged
goods
Traditional stores 100 114 103 ---
Small supermarkets 104 101 100 103
Medium supermarkets 106 100 102 103
Large supermarkets 111 101 105 102
Hypermarkets 107 105 107 100
Municipal markets 107 111 102 ---
Mean 106 105 103 102
Maximum 111 114 107 103
Source: Ministry of Industry, Trade and Tourism of Spain (2003)
Table 2. Explanatory variables and hypothesis
FACTOR CONCEPTO VARIABLE Signo
esperado
Concentration Retail Market Concentration +
Size Average size of store -
Point of sales share -
HORIZONTAL Types of Retailers Hypermarkets -/+
COMPETITION
Large Supermarkets -/+
Medium Supermarkets +
Small Supermarkets +
Reputatión Reputation +
Multimarket Multimarket contact +
competition Multimarket * Concentratión -
Power relation Relative Market Share Manufacturer – +
VERTICAL manufacturer – Retailer
COMPETITION retailer
Retail brand Share of Retail Brand +
Vertical integration Belongs to a buying group -
Demand Income +
MARKET Demand variation +
ENVIRONMENT Regional consum +
Costs Canary Islands +
Differentiation / Labour unit costs +
COMPETITIVE service
STRATEGY Efficiency General administration unit costs
+
Net Margin -
30
Table 3. Measurement and source of information of the variables used in the proposed
price model
DEPENDENT INDICATOR DEFINITION SOURCE
VARIABLE:
OCU
Price Sale price Retail sale price of the products analysed at each one of (Consumer
the considered points of sale and Users
Organization)
EXPLANATORY INDICATOR DEFINITION SOURCE
VARIABLES:
Market Concentration 4 Firm CR m2 of retail floorspace of the 4 larger retailers of the Alimarket
of Province province versus total retailing floorspace (province)
Size Average size of Store m2 of retail floorspace of the retailers of the province Alimarket
versus total number of stores
Point of sales share Point of sales share m2 of retail floorspace of the store versus m2 of retail Alimarket
floorspace of total number of stores in the province
Hypermarkets Stores with retail floorspace over 2.500 m2
Large Superm. Stores with retail floorspace between 1.000 and 2.500
Types of Retailers m2 A. C.
Medium Superm. Stores with retail floorspace between 400 and 999 m2 Nielsen
Small Superm. Stores with retail floorspace under 400 m2
Multimarket Competition Multimarket Contact nº of multimarket contacts that the retailers of the OCU
province have
Multimarket and Multimarket * Multiplying multimarket and concentration variables Alimarket
Concentration Concentration and OCU
Reputation Reputation of Retailers Retailers with a higher reputation and higher level of OCU
Chain service.
Ratio of manufacturer Sales concentration of the 3 main manufacturers at a A.C. Nielsen
Relative Market Share CR-3 and retailer national level in each of the analysed product and
Manufacturer Retailer market share categories divided by the national market share of the Alimarket
retailer
Share of Retail Brand Retail brand share in Retail brand sales in the product category versus total A.C. Nielsen
category category sales volume
Belongs to the IFA Establishments that belong to the IFA buying centre
Buying Centre Centre Alimarket
Belongs to the Establishments that belong to the Euromadi buying
Euromadi Centre centre
Income (demand variable) Income level per Income level per inhabitant on the capital of the Anuario
inhabitant province Económico
de España.
Caixa
Demand variation Demand variation % increase or decrease units sold with respect to last IRI
year
Regional Consum Regional Consum Index (100) units consumed in each IRI Spanish region IRI
Canary Islands Store location in the Stores located in the Canary Islands OCU
Canary Islands
CABSA,
Labour Costs Personnel unit costs Percentage of personnel costs with respect to sales Analysis and
Balance
Sheet
Organisation
General Administration Operational costs, Percentage of general administration costs with respect CABSA
Costs excluding personnel to sales
costs
Net margin Profit margin after Percentage of profit margin after taxes with respect to CABSA
taxes sales
31
Table 4: Estimates of coefficient and t-values of the price equation in the packaged products
model (N=19,991)
Non-standarised Standarised
Variables Coefficients Coefficients t-score Signific.
Dependent Variable: Standart
Price B Error Beta
(Constant) -,647 ,149 -4,334 ,000
Reputation ,859 ,024 ,281 36,065 ,000
Hiper -,393 ,028 -,188 -13,919 ,000
Share M -R ,001 ,000 ,104 13,012 ,000
Administ. Costs ,033 ,033 ,091 11,765 ,000
Large Super -,111 ,017 -,057 -6,420 ,000
Sales variation ,003 ,001 ,054 5,992 ,000
Region. Consum -,002 ,000 -,035 -4,578 ,000
Multimarket ,036 ,018 ,090 1,944 ,052
Concentration ,008 ,002 ,087 3,725 ,000
Canary ,163 ,045 ,028 3,616 ,000
MultiConcent -,001 ,000 -,131 -2,452 ,014
Share point of sale -,003 ,001 -,029 -2,416 ,016
Retail brand share ,001 ,001 ,014 1,829 ,067
Table 5: Estimates of coefficients and t-values of the price equation

in the fresh products model (N=9,896)
Non-standarised Standarised
Variables Coefficients Coefficients t-score Signific.
Dependent Standart
Variable: Price B Error Beta
(Constant) -,621 ,083 -7,465 ,000
Reputation ,970 ,032 ,298 30,180 ,000
Income ,001 ,000 ,085 7,976 ,000
Large Super ,142 ,022 ,070 6,338 ,000
Hiper ,168 ,025 ,077 6,761 ,000
IFA ,135 ,027 ,053 5,058 ,000
Greens ,063 ,020 ,031 3,177 ,001
Canary ,174 ,063 ,028 2,771 ,006
Average size ,001 ,000 -,029 -2,562 ,010
Multimarket ,012 ,005 ,028 2,517 ,012
32
THE EFFECT OF USAGE SITUATION ON PURCHASE BEHAVIOR OF CONSUMER GOODS
THE EFFECT OF USAGE SITUATION ON

PURCHASE BEHAVIOR OF CONSUMER GOODS
JAIME ROMERO DE LA FUENTE1
ABSTRACT
This paper focuses on perception of consumers with regard to the suitability of products to
their usage situations, or circumstances in which the subjects foresee using them. A
methodology to measure these perceptions of suitability and to assess their effects on buyer
behaviour is proposed, through a model which sets a compensatory evaluation process of
alternatives based on usage situation and product prices..
KEY WORD
Usage Situation, Choice Models, Product Development, Scanner Panel Data
1
Cantoblanco, Ctra. de Colmenar Viejo, km. 15, 28049 Madrid. Spain. E- mail: (34)914973544. e-mail:
jaime.romero@uam.es
The author acknowledge financial support provided from the Spanish Ministry of Science and Technology through the project
BEC2003-07996. The scanner database employed in this work has been provided by the project FEDER 1FD97_1939. 1999 –
2001.
33
1. INTRODUCTION
Purchase and consumption behaviors are the outcome of the interaction of three kinds of factors:
buyers or consumers, product attributes and situational characteristics (Sandell, 1968).
The most notable advances in the comprehension of purchase and consumption processes come
from theoretical and empirical literature that has researched the effects of psychosocial
dimensions of buyers/consumers and of product attributes. By contrast, advances with regard to
the effects of usage situation are short. This lack of research efforts does not correspond with the
importance that individuals attach to when, where and how they are going to use products.
In this research stream the studies of Stanton and Bonner (1980) and Fennell (1978) contribute to
the develo pment of a proper theoretical framework to measure the usage situation effects on
purchase and consumption behaviors. On the one hand, Stanton and Bonner (1980) include the
usage situation in the purchase and consumption behaviors using a Stimulus-Organism- Response
model. Its main contribution is to identify the usage situation effect on the purchase process,
through the concept “intended consumption situation”. The empirical contrast of their model
concluded that the intended consumption situation is the factor with the highest prediction ability
with regard to the form, brand and variety of the product chosen by purchasers. This result
suggests that explanatory models which do not include variables to measure the usage situation
effects (e.g.: Guadagni and Little, 1983; Bucklin and Lattin, 1991, Krishnamurthi and Raj, 1991,
among many others) are omitting a key factor and, as a consequence, their findings only can be
interpreted as partial. On the other hand, Fennel’s work (1978) proposes that the influence of
usage situation is exerted along several stages of choice process, especially during the formation
of the attitudes toward alternatives.
The lack of research efforts devoted to this topic and the relevance of previous findings (Bearden
and Woodside, 1976 and 1978; Belk 1974a, 1974b and 1975; Miller, 1975; Miller and Ginter,
1979; Stanton and Bonner, 1980) recommend opening lines of work about the effects of usage
situation on purchase behavior. More specifically, the most promising and interesting research
avenues are focused on consumer’s perception with regard to whether a product is appropriate for
one or more usage situations. This perception influences directly the relationships of
substitutability among products and, therefore, market structure (Srivastava, Alpert and Shocker,
1984; Srivastava, Leone and Shocker, 1981; Srivastava, Shocker and Day, 1978). Marketing
managers can modify this perception using some common marketing tools (Wansink, 1994;
Wansink and Ray, 1996).
The objective of this study is to develop a methodology which allows measuring consumer’s
perception regarding usage adequateness of products to their usage contexts, as well as to test its
effect on buyer behavior. An application to a consumer goods category, home cleaners, is
presented. In this category, consumers plan their purchase according to the anticipated usages of
the product.
To achieve this objective, this paper is organized in five sections. A theoretical framework that
incorporates the usage situation effects on purchase behavior through the concept of usage
suitability is presented in the first section. In the second one, a methodology for the measurement
of usage suitability is proposed, in order to include the usage situation effects in choice models.
Thirdly, the theoretical framework is tested and finally managerial implications and conclusions
are presented.
34
This study is exploratory in nature and is included in a broader project that analyses the effects of
usage situation on market structure.
2. USAGE SITUATION AND ATTITUDE FORMATION

In the earliest stages of purchase process, consumers classify market offerings in several
categories, in order to facilitate their decisions. Those products which are considered
unacceptable by consumer, or just indifferent, are not evaluated in subsequent stages of choice
(Narayana and Markin, 1975). The remaining products are included in the consideration set or
evoked set (Schiffman and Kanuk, 1997). These products are the alternatives which are evaluated
by consumers.
The usage situations, or the circumstances in which consumers intend to use the product, are a
guide for consumers during the identification of what products meet their needs (Fennell, 1978).
During purchase, buyers anticipate in which situation or situations they can use o consume the
product (Stanton and Bonner, 1980). This anticipation, besides other contextual factors and the
characteristics of alternatives and buyers (Sandell, 1968; Belk, 1974a, 1974b and 1975),
influence the result of choice process.
The anticipation of usage situations allows consumers identifying the functionality they must
require to the products they are going to purchase. The required functionality is the set of
functional benefits sought by consumers in the usage contexts in which they will use the product.
Thus, consumers can anticipate usage contexts with different degrees of accurateness.
Nevertheless this does not affect the formation of the required functionality.
According to Lefkoff-Hagius and Mason (1993), products are defined in terms of three types of
attributes: physical characteristics, benefits and image features. In this paper we will focus on
benefits and image features. The latter ones include prices, brands, sizes, packaging, etc. Each of
them influences consumer choice in a different way. This paper will only analyse product price,
which is considered to be the most succinct factor used by consumers in order to make their
decisions. Price exerts a negative influence on the evaluation of any alternative when it acts as a
financial restriction. Additionally, price has a positive effect if it acts as a quality signal.
Regarding benefits, in our framework these are related to the functionality offered by products
through their usage. Consumer evaluates choice alternatives with regard to a required
functionality. As stated by Miller (1975), purchaser compares the functional benefits provided by
alternatives with ideal values that represent the required functionality in each and every usage
situation of the product category. The result of this evaluation provides purchaser with a measure
of the suitability of the product to its anticipated or intended usage. The suitability indicates the
ability of a product to offer the benefits required by a user during consumption situations. It
might be referred to one context or to several simultaneously. Therefore, the evaluation of usage
suitability might be referred to one or several situations, every one having a positive influence of
different strength (Miller, 1975; Bearden and Woodside, 1976 and 1978).
According to an extensive literature in the consumer behaviour area, we assume that purchasers
make their decisions following a compensatory rules (e.g.: Miller, 1975; Miller and Ginter,
1979). Therefore, our framework can be expressed mathematically under some well-known
assumptions by a multinomial logit formulation:
35
Note: See appendix in the word document E-1
The utility of an alternative i in the period t for a consumer h of a category with M usage
situations is expressed as follows:

where:
-PRICEit is the price of the alternative i in the period t
-PSc1 , PSc2, ..., PScm are the measures of the suitability of alternative i to the required
functionality in the 1…M situations of the category.
Two propositions are derived from our framework:
Proposition 1: The suitability of a product to its usage situations influences positively the choice
probability of the alternative
Proposition 2: The influence of product suitability to its usage situations on the evaluation of
alternatives is not homogenous between situations.
3. METHODOLOGY TO CONSTRUCT A USAGE SUITABILITY INDEX

In order to measure the usage suitability of a product to its main usage contexts, we need to know
which are these usage situations as well as what products might be used as substitutes in those
situations. To perform this task, the procedure suggested by the substitution in use approach for
market structure analysis (Srivastava, Shocker and Day, 1978; Srivastava, Leone and Shocker,
1981; Srivastava, Alpert and Shocker, 1984) has been followed. Once products and situations
have been identified, information about the actual usage of the product is collected. This
information is used to construct a suitability index.
Our universe has been defined as “women, older than 19 years old, whom organize or do the
home cleaning, as well as the purchase of home cleaners in their household”. Purchase in home
cleaners’ category is usually made by people of these characteristics (Martinez, 1996).
In a first stage of this methodology usage situations of the analysed category, home cleaners, and
products which might be used in those situations have been identified through ten in-depth
interviews. The sample has been stratified by age and occupation (working within/outside home).
We have obtained a double list of products and usage contexts.
In a second stage of the methodology, usage situations are filtered in order to avoid unnecessary
duplications and the employment of no valid contexts in the subsequent stages of this work,
through the analysis of actual usage of products in situations. This information has been collected
by survey (n=51 consumers) and has been summarized in a Product X Situation matrix in which
the intersection of a column and a row indicates the frequency of usage obtained by a product in a
situation. A Correspondence Analysis (CA) has been conducted. Factors are interpreted as
attributes of the situations, which might be combined to characterize every original usage
situation. This analysis allows making a new list of situations, summary of the previous one and
without duplications, throughout the combination of the product attributes which a consumer
employs to evaluate the usage of a product in a given situation (table 1).
36
In a third stage of our methodology, the suitability of the products to every new usage situation is
measured employing information collected by survey (n=516). More specifically, a questionnaire
has been designed to collect data with regard to the usage of the products in the situations, by a
dichotomous scale. Again, information has been summarized in a Product X Situation matrix. A
CA has been conducted in order to represent simultaneously situations and products in the same
perceptual space (Hair et al, 1999, pp. 577-578), throughout the extraction of dimensions which
are common to both elements. To quantify usage suitability a geometrical, very intuitive and
easy-to-calculate measure has been selected: the angle formed by the vectors traced from the co-
ordinate origin to every pair of products and situations of the category under study. In order to
facilitate its interpretation (the scale oscillates between 0º and 180º, with a value of 90º indicating
null correlation), the following transformation is proposed:
where:
- PS (Si, Pj) is the suitability of product j to situation
?
- Si is the vector traced from the co-ordinate origin to situation Si
?
- Pj is the vector traced from the co-ordinate origin to product Pj
This measure oscillates between [-100,100]. The value -100 indicates maximum negative
correlation, 0 null correlation and 100 maximum positive correlation.
To estimate the empirical model, besides the data obtained through the methodology described
above, scanner data proceeding from a retail outlet have been used. These were collected in 52
weeks, corresponding to a period of one year from 2nd of January to 31st of December of 1999.
The number of purchase occasions is 3979. Maximum likelihood estimation has been employed.
4. RESULTS
Following the methodology stated above, suitability indexes are computed (table 2). They
represent the perceptions of an average consumer with regard to the benefits provided by
products. More specifically they represent consumers’ perceptions regarding the fit of the
functional benefits of products to the required functionality in some usage contexts.
For an average consumer, no product offers a combination of functional bene fits which makes it
appropriate for every usage situation. The home cleaners’ category is characterised by a high
specialization of its products. On the one hand, there are products focused on one situation. This
is the case of bathroom gel with bleach, kitchen gel, liquid cleaner for bathroom, liquid cleaner
with additives, multi-purpose spray and kitchen cleaner in powder. Their performance in their
usage situations is very high, close to the upper limit of our scale. On the other hand, the
remaining products of the market are perceived as appropriate for several usage situations
simultaneously (no more than three). Nevertheless, their suitability is not as high as in the case of
specialized products. For all the products, this perceived specialization does not imply that they
would be classified as highly inadequate for the situations in which they are not specialized.
Regarding the theoretical framework proposed in this paper, results are shown in table 3. The
model fit is satisfactory. The R² is higher than 0’32 and the adjusted R² is almost the same value.
The signs of the estimators are the expected ones. Price coefficient is negative, and the every
usage suitability coefficients are positive. All are statistically significant.
37
Once the choice model has been estimated, our propositions are analyzed. Firstly, proposition 1
indicates that the suitability of a product to a usage situation influences positively its choice
probability. In this model, seven suitability measures have been included, corresponding to the
seven usage contexts previously identified in this work. T-student tests over these parameters
show that all of them exert a positive influence at a 99% confidence level. Therefore, proposition
1 is confirmed.
Secondly, proposition 2 states that the effect of the suitability of a product to each usage situation
on the evaluation of alternatives is different between situations. This proposition has been studied
through t- student tests for every pair of suitability parameters ? i (i=1...7).The results indicate
that all of them are different from each other, at a confidence level of 99%. Therefore,
proposition 2 is also accepted.
In sum, our results indicate that usage suitability positively influences choice probability,
although its strength varies according to usage contexts.
5. MANAGERIAL IMPLICATIONS AND CONCLUSIONS

From a managerial perspective, a practitioner can modify perceptions of suitability through
advertising (Wansink, 1994; Wansink and Ray, 1996) and through product design. Advertising
influences perceptions directly, while the process of product design generates a set of physical
and image attributes that is interpreted in terms of functional attributes by consumers, and
subsequently in terms of usage suitability. With regard to product design, a manager must know
which attributes are relevant when a consumer evaluates suitability. Not every feature might be
significant. Besides, they might have either a positive or a negative effect.
In order to identify the relevant physical and image features that influence perceptions, it is
proposed to use a regression model. In this model, the explanatory variables are product features
while the dependent one is the suitability to a situation. In our study, these product features have
been encoded as dummy variables, corresponding to the presentation of the product (gel, liquid,
pistol or spray, and powder), its specialization (kitchen, bathroom, not specialized) and the
presence of additives in its formula (bleach, ammonia, other additives and no addit ives).
The results are shown in table 4. As expected, not every attribute has a significant effect on the
perception of suitability to each usage situations. The number of attributes with a significant
influence oscillates between one (floors, kitchen implements, household fabrics and glass
surfaces and audio -visual equipment) and three (bathroom fixtures). This influence is always
positive except the presence of bleach, which has a negative effect on the perception of suitability
to one situation (cleaning wood floors). In all cases but tiles, suitability is properly explained by
product features.
Using this information, a manager dealing with a product modification or a new product launch
could compute the suitability index of a product. Subsequently, the manager could incorporate
these indexes in the choice model estimated above and predict market reactions (in terms of
shares) to his/her decisions.
The literature which has studied the effect of usage situation on choice process is conclusive.
Usage situation influences attitudes formation toward alternatives. The anticipation of usage
contexts during the purchase process allows consumer to evaluate products with regard to some
required functionality during foreseen or intended usage situations. The result of this evaluation
conditions the final choice.
38
In this paper a methodology to include usage suitability in choice models has been proposed.
Besides, a model to validate the effect of usage suitability on purchase behaviour has been
estimated. The results show that consumer positively evaluates usage suitability of products.
There are differences in the strength of the influence exerted by this factor, according to the usage
situation to which is referred.
Consumers’ perceptions of usage suitability can be modified through advertising and product
design. With regard to the latter, a manager can evaluate how a new product is perceived in terms
of suitability, through an analysis of its physical and image attributes. Subsequently, this
information can be used to estimate its potential market share.
Among the limitations of this work, the lack of temporal and geographic correspondence between
the two data sources employed must be pointed out. Additionally, to include new explanatory
variables of consumer behavior is required. To complete the proposed model with new
explanatory factors is one of the research areas opened by this work. This would allow advancing
in the second research area opened here: the application of these models to market structure
analysis. Once completed with new variables, the proposed model would permit gaining insights
into interchange and competition relationships among products in markets.
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TABLES
Table 1. Products and usage situations
PRODUCTS USAGE SITUATIONS
- Bathroom gel with bleach - Wood surfaces and floors

- Kitchen gel - Floors (other than wood)
- Cleaning gel - Tiles
- Bleach and detergent cleaner - Bathroom fixtures
- Liquid cleaner with bleach - Cups, silverware, pots, pans and
- Liquid cleaner with ammonia kitchen implements
- Liquid cleaner for the bathroom - Household fabrics (carpets, upholstery,
- Liquid cleaner with additives cloth-lined items...)
- Liquid cleaner - Glass surfaces and objects (windows,
- Pistol-grip cleaner with bleach tables, lamps...) and audio-visual
- Pistol-grip cleaner for the bathroom equipment
- Pistol-grip liquid cleaner
- Multi-purpose spray
- Kitchen cleaner in powder
41
Table 2. Suitability indexes
PRODUCT SWF SOF STL SBF SKA SHF SGS

Bathroom gel with bleach -11 -12 -9 98 -23 -21 -29
Kitchen gel -22 -29 -16 -23 99 -26 -36
Cleaning gel 6 36 76 -12 26 -16 -70
Bleach and detergent cleaner -36 78 36 47 -23 -16 -55
Liquid cleaner with bleach -21 81 51 38 -34 -30 -49
Liquid cleaner with ammonia -15 9 77 -12 -36 75 -14
Liquid cleaner for the bathroom -17 -10 7 100 -29 -20 -30
Liquid cleaner with additives 99 19 -20 -17 -7 -9 -21
Liquid cleaner 40 86 -23 -31 -1 -18 -26
Pistol-grip cleaner with bleach -44 -11 73 -22 21 58 -30
Pistol-grip cleaner for the bathroom -15 -23 59 71 -35 -17 -22
Pistol-grip liquid cleaner -20 -42 -27 -29 -28 -10 97
Multi-purpose spray 4 -50 -42 -37 -30 19 98
Kitchen cleaner in powder -16 -31 -26 -24 32 80 0
Swf: suitability for cleaning wood floors
Sof: suitability for cleaning floors other than wood
Stl: suitability for cleaning tiles
Sbf: suitability for cleaning bathroom fixtures
Ska: suitability for cleaning cups and kitchen appliances
Shf: suitability for cleaning household fabrics
Sgs: suitability for cleaning glass surfaces and audio-visual equipment
42
Table 3: Choice model coefficients
Variables Coefficients
Price -0,002982 ***
Suitability for cleaning wood floors 0,842763 ***
Suitability for cleaning floors other than wood 1,211798 ***
Suitability for cleaning tiles 0,934705 ***
Suitability for cleaning bathroom fixtures 1,517898 ***
Suitability for cleaning cups and kitchen appliances 1,946727 ***
Suitability for cleaning household fabrics 0,623373 ***
Suitability for cleaning glass surfaces and audio-visual equipment 2,041569 ***
LL -7138,18
?2 0,3202
? 2 ADJUSTED 0,3195
AIC 3,5920
BIC -7171,34
CAIC 14313,17
*** significant at a confidence level of 99%
Table 4: Regression Model
SWF SOF STL SBF SKA SHF SGS

Constant -6,11 -20,25 n.s -31,19 -12,85 -2,00 -33,00
(0,35) (0,12) (0,00) (0,09) (0,84) (0,02)
Gel
Liquid 64,08 23,70

(0,00) (0,02)
Pistol-grip 68,75
(0,01)
Bathroom 101,56
(0,00)
Kitchen 111,85
(0,00)
Bleach -21,89 34,20
(0,08) (0,00)
Ammonia 77,00
(0,05)
Additives 105,11
(0,00)
R2 0,73 0,46 n.s 0,90 0,58 0,23 0,37
18,48 12,13 n.s 40,64 19,08 4,79 8,50
(0,00) (0,00) (0,00) (0,00) (0,05) (0,01)
(p-values); n.s.: non significant
43
IMPLEMENTATION OF STORE BRANDS AND ALTERNATIVE STRATEGIES FOR MANUFACTURER BRANDS
IMPLEMENTATION OF STORE BRANDS AND

ALTERNATIVE STRATEGIES FOR
MANUFACTURER BRANDS
NATALIA RUBIO1
ABSTRACT
Store brands have evolved considerably since their appearance, achieving a higher market
share in some categories of products of mass consumption than manufacturer brands. The
development of store brands is conditioned in large part by market structure variables.
However, the manufacturer can consider a combination of alternative strategies to defend its
brands from the growing threat of store brands. This study analyzes the effect of the market
structure on the store brand market share, particularly the effect of price elasticity of demand,
retailers´ competitive structure and competitive structure at the manufacturer level, in the
Spanish market of mass consumption products from 1997 to 2001. During the latter year, we
developed a study to manufacturing business units that emphasizes the strategies most used by
these agents in the face of store brands. Among them, we examine the effect of differentiation,
innovation and promotion policy on store brand market share.
KEY WORD
Store brand, market share, strategy
1
Cantoblanco, Ctra. de Colmenar Viejo, km. 15, 28049 Madrid. Spain. E- mail: natalia.rubio@uam.es,. Tel: (34)
914973567.
The author thanks the valuable comments and suggestions of the two anonymous reviewers, which enabled them to improve the
initial research substantially.
44
1. INTRODUCTION
Originally, store brands were conceived by retailers as tools for profitability, while today they are
considered an important marketing tool insofar as they convey an image of the establishment and
can affect the consumer's loyalty to the same (Corstjens and Lal, 2000). Store brands currently
enjoy a considerable market share in a large number of product categories. In the Spanish market
of mass consumption products, according to data from Information Resources Inc. (IRI) for the
year 2003, the store brand market share is very high for food products (a value of 27.7%), but
remains low for personal hygiene (16.6%) and baby care products (13.2%). The segmentation of
these brands into different product categories (Laaksonen and Reynolds, 1994; Dunne and
Narasimhan, 1999), the progressive marketing effort by the distributor for its own brands (Hoch
and Banerji, 1993; Hoch, 1996), the reduction of quality differentials between manufacturer and
store brands and the competitive price that store brands continue to have compared to
manufacturing brands (Halstead and Ward, 1995) are factors that explain the wide acceptance of
store brands among consumers. Store brands have growing acceptance, above all, in elastic
product categories with frequent consumption, where consumers perceive less risk in purchasing
(Dhar and Hoch, 1997; Sethuraman and Cole, 1997).
The growing degree of retail concentration (Borghesani, de la Cruz and Berry, 1997) and the
reduced number of brands that are commercialized on the shelves (Simmons and Meredith, 1983;
Puelles, Fernández de Larrea and Albert, 1997; Fernández and Gómez, 1999) grant the distributor
negotiating power that can be used in the channel to gain favourable concessions from the
producer for their manufacturer brands or for the store brands they produce (Narasimhan and
Wilcox, 1998). These concessions can take the form of lower list prices, as well as better
management of the store brand products. Many manufacturers must comply with the demands of
retailers as a result of the threat that they may exchange the provider of store brand and the costs
derived from ceasing production of these brands (Quelch and Harding, 1996).
The development undergone by store brands has appeased reactions from many leading
manufacturers who opposed their production. Many manufacturers refused, whether from the
beginning or later, to develop store brands due to the problems that might arise if consumers
learned of this fact. Others, in contrast, decided to develop these brands to have some control
over them and to improve their relation with the distributors and thus favour the merchandising of
their manufacturer brands in the establishment.
The levels of store brand market share are influenced by both variables of market structure and
competitive strategy. This study will first analyze the effect of market structure variables that the
academic literature emphasizes as conditioning principals of store brand market share. Second, it
will investigate the effectiveness of the strategies most frequently used by manufacturers to
defend their brands.
In the following section, we present the academic literature's main findings on the influence of
both issues on the store brand market share, which support the hypotheses formulated. The
methodology section describes the sources of secondary data used to analyze the effect of market
structure and competitive strategy by the manufacturer on the store brand market share. It also
describes the primary research performed to determine the strategies most frequently used by
manufacturers against these brands. We then develop the empirical analyses, describe the results
obtained and present the main conclusions, limitations and future lines for research.
45
2. LITERATURE REVIEW
2.2 The effect of market structure on the store brand market share
The market structure variables that condition the store brand market share, which are studied
often in the academic literature, are price elasticity of the category, retailers' competitive structure
and competitive structure at the manufacturer level. Price elasticity can be seen in the exchange
(1) between brands of the same product category, (2) between product categories within the same
establishment and (3) between brands and product categories of different establishments. Overall,
the marketing literature suggests that the price elasticity intra- and intercategory within one
establishment is much greater than that observed between establishments (Kumar and Leone,
1988; Walters, 1991).
Much research has examined the relation between intracategory price elasticity and the store
brand market share, finding that the price elasticity of the product categories is a determining
factor in the market share of these brands. The store brand products have traditionally been
perceived as having lower quality and price as compared with manufacturer brands. Thus most of
the studies reviewed, among others those of Hoch (1996), Dhar and Hoch (1997), and Erdem,
Zhao and Valenzuela (2004), indicate that store brands are primarily acquired by price-sensitive
consumers and that these brands achieve a higher market share in categories with greater price
elasticity of demand.
Based on the foregoing, we propose the following hypothesis:
H1: The store brand market share is higher in product categories with greater price elasticity of
demand.
With respect to retailers' competitive structure, Narasimhan and Wilcox (1998) warn that a high
concentration of establishments that market store brands contributes to increasing the retailer´s
power in the channel. The distributor can exercise its power to improve the quality and
positioning of its own brands and thus also their market shares. Further, the distributor can take
advantage of economies of scale and scope resulting from concentration to increase the presence
of store brands in his or her establishments, thereby favouring the market share of these brands
(Putsis, 1997).
On the other hand, rivalry among commercial establishments can also positively affect the store
brand market share. Retail competition must be measured both by the number of establishments
and by the distribution of their market shares. Dhar and Hoch (1997) observe that the greater the
number of retail competitors and the homogeneity of their market shares, the more intense the
competition and the lower the market share of a specific store brand. However, Corstjens and Lal
(2000) emphasize that the commercializing of store brands by a high number of establishments as
well as strong retail competition among them positively affects the development of quality
control programs for these brands and thus favours their market share considered in aggregate
form for all of the establishments.
The result is that a high sales concentration in establishments that distribute store brands as well
as intense competition among these establishments favours the store brand market share.
From this it follows that:
H2: The store brand market share is higher in categories with a greater degree of retail rivalry.
46
On the level of the manufacturer, we should turn our attention to the effects of the concentration
of manufacturer brands and the competitive rivalry among them.
In relation to the manufacturer brand concentration, basic economic arguments support the
existence of a negative relation with the store brand market share. Thus the greater the aggregate
market share of a specific number of manufacturer brands, the smaller the market share that store
brands can choose.
Further, a high manufacturer brand concentration provides this agent with economies of scale and
scope that enable it to apply lower unit prices. However, this also gives the manufacturer greater
market power, negotiating power in the channel and therefore, greater ability to increase the
prices of its brands (Bain, 1951, 1956; Demsetz, 1973). In markets with a high manufacturer
brand concentration, insofar as the conjunction of the three issues mentioned does not result in an
unjustified increase in the price of manufacturer brands, store brands will enjoy lower market
share (Putsis, 1997; Dhar and Hoch, 1997; Cotterill, Putsis and Dhar, 2000).
As to the competitive rivalry among manufacturer brands, studies such as those of Simmons and
Meredith (1983) and McMaster (1987), indicate that the store brand market share is lower in
markets with no strong leading manufacturer brand and where various manufacturer brands rival
each other for first position. In these markets, there is intense price competition amo ng
manufacturer brands, which affects the store brand market share negatively.
Taking the previously mentioned issues into consideration, we propose the following hypotheses:
H3: The store brand market share is lower in product categories with greater manufacturer brand
concentration.
H4: The store brand market share is lower in product categories with greater rivalry among the
leading manufacturer brands.
2.3 The effect of the manufacturers’ competitive strategy on the store brand market share
Manufacturers can adopt a combination of strategies to defend their brands against store brands.
Strategies that give their brands a favourable competitive position, specifically differentiation and
innovation, are the two most recommended by previous studies. Manufacturers can also
counteract the positive effect that the better quality-price relation associated with store brands
exercises on their market share by means of promotion policies directed toward improving the
consumer's perception of the value of manufacturer brands.
In the academic literature, many studies establish a positive relation between the degree of brand
differentiation and its market share (Farris and Albion, 1980; Assmus, Farley and Lehmann,
1984; Tellis, 1988). Differentiation constitutes a key component in the creation and modification
of a brand's image and the improving consumers' knowledge of it, which in turn affects its market
share. Hoch and Banerji (1993) and Ashley (1998) observe that the manufacturer brand
differentiation creates significant barriers that inhibit the growth of store brands. Research by
Putsis and Cotterill (1999) and Cotterill et al. (2000) has also shown the negative effect of the
manufacturer brand differentiation on the store brand market share.
The manufacturer brand differentiation favours greater loyalty to these brands, enables increase
of the price differential between manufacturer and store brands, reduces price elasticity of the
demand and decreases the degree of substitutability between manufacturer and store brands in the
product category (Lal and Narasimhan, 1996). Connor and Peterson (1992) find that product
47
differentiation constitutes the main explanatory factor of the price differentials between
manufacturer and store brands.
Based on the foregoing, we formulate the following hypothesis:
H5: Manufacturer brand differentiation affects negatively the store brand market share.
On the other hand, Hoch (1996) advises the producer to renounce the low-price segment of the
market, the segment occupied by distributors, and to increase the distance between their
manufacturer brands and the store brands, by means of offering a new and improved product.
Offering a new or improved product keeps the consumer from seeing the manufacturer brand as
similar in quality to the store brand but unfavourable in price. The manufacturer must invest in
brand value, in obtaining the desired position, in increasing the imitation costs, etc.
The academic literature maintains that the innovation performed by manufacturers in their brands
has positive repercussions on the manufacturer brand market shares and constitutes a barrier to
the development of store brands in the product category. Authors such as Simmons and Meredith
(1983), Hoch (1996) and Recio and Román (1999) propose the manufacturer to invest in
innovation to increase the distance between its brands with respect to store brands.
Simmons and Meredith (1983) indicate that product categories that offer greater product variety
and higher investment in innovation show less presence o f store brands. Further, in these sectors,
the risk that the store brands are not able to communicate quality similar to that of the
manufacturer brands is quite high. On the other hand, the considerable innovation costs that the
producer incurs in these markets reduces its willingness to manufacture and supply store brands.
A study by Messinger and Narasimhan (1995) finds a negative and significant effect of the
number of new or improved products on the store brand market share.
From this analysis of the literature, we propose the following hypothesis:
H6: Innovation in manufacturer brands affects negatively the store brand market share.
In addition, the manufacturer can increase its promotion policy to motivate the acquisition of its
manufacturer brands against store brands. Ailawadi, Neslin and Gedenk (2001) identify four
kinds of consumers: (1) of store brands, (2) of promotions, (3) of store brands and promotions
and (4) of neither store brands nor of promotions. They observe that differences exist between
consumption of store brands and consumption of promotions. Both are linked to cost benefits
(from change of brand or establishment, search for information, choice of alternatives and
inventory). However, while the consumption of store brands is more tightly linked to economic
or utilitarian benefits (savings and product quality), that of promotions is primarily associated
with hedonistic benefits (entertainment, exploration, personal satisfaction with the gain obtained
in the transaction, etc.). Authors such as Burton, Lichtenstein, Netemeyer and Garretson (1998)
classify the promotions as a function of whether they offer the consumer a direct price incentive
(sale or coupons) or an indirect one (greater quantity of the product, gifts, the possibility of
obtaining a prize by participating in a contest, etc.).
Hoch and Banerji (1993) show the effectiveness of price reduction in manufacturer brands to
increase their market share. However, they also warning that this strategy creates greater
consumer sensitivity to price for the product category, which can affect the manufacturer brand
capital. Burton et al. (1998) find a positive relation between consumer sensitivity to direct price
promotions and the attitude toward store brands. This link could stem from the cost benefits
derived from acquiring a brand with a price lower than usual or from the acquisition of a store
48
brand. In both cases, the consumer obtains utility in the transaction by finding a price lower than
his or her internal reference price (Rosch, 1975; Thaler, 1985).
Thus, the effect of promotional activity in one category on the store brand market share will be
negative to the extent that the promotions applied do not act to the detriment of the greater
manufacturer brand capital. Indirect price promotions (in contrast to direct price promotions) will
probably increase the distance between manufacturer and store brands as a result of the lower
sensitivity to price that they generate and will thus be more successful in facing the store brand
market share.
Based on the foregoing, we propose:
H7: The effect of indirect price promotion on the store brand market share is negative and
contrary to the effect of direct price promotion.
3. METHODOLOGY
First, in order to contrast the hypotheses proposed on the effect of the market structure variables
on the store brand market share, we performed an empirical study of the Spanish market of mass
consumption products for fifty product categories from 1997 to 2001. The product categories
belong to the general food and drink sectors, personal hygiene, and house cleaning. The
information used was obtained from A.C. NIELSEN.
Second, to understand the strategies employed by manufacturers against store brands, we
performed an ad hoc study by means of a postal survey to business units manufacturing of mass
consumption products. The universe is composed of manufacturers of mass consumption
products with a total turnover of more than 4.81 million euros, which were identified using a
database of companies. To motivate response, we collaborated with the association of
manufacturer PROMARCA, which represents manufacturers with high turnover. Although the
questionnaire developed consisted of a series of questions that analyze exhaustively the
phenomenon of store brands for manufacturers and non-manufacturers of these brands, this
article uses only the information referring to the strategies of manufacturers who declare that they
do not produce store brands. The fieldwork was performed during the year 2001, and the number
of valid questionnaires received was 76. The sample size was considered appropriate for
representing this group the manufacturers of the main brands.
The replies obtained from the questionnaire indicate that the strategies of differentiation
(advertising investment and positioning in the high price range) and innovation (investment in
R+D and category management) are widely used by producers of recognised manufacturer brands
to confront the store brand. Promotion policies also appear among the main strategies mentioned
(Table 1).
Table 1. Strategies adopted against store brands
To test the effect of the strategies most commonly adopted by manufacturers in the store brand
market share, we used information from secondary sources, specifically, INFOADEX for
differentiation and INFORMATION RESOURCES INC. (IRI) for innovation and promotions.
49
The information was obtained for the year 2001 and the fifty NIELSEN categories under
analysis.
To process the information, we used the statistical package SPSS 12.0. We applied the
multivariate analysis technique of regression to evaluate the effect of the variables of the
manufacturer's competitive strategy and of the market structure on the store brand market share.
We also used the multivariate analysis technique of principal components, to summarize the
actions of the manufacturer's competitive strategy and to avoid violating the basic assumption of
multicollinearity that appears when analyzing the effect of the totality of the strategy variables on
the store brand market share.
Table 2 shows the measurement of each of the variables considered to be determiners of the
store brand market share and the symbol of the hypothesis we wish to contrast.
Table 2. Hypotheses, measurement of variables and expected signs
4. RESULTS
4.1. The effect of the manufacturer´s competitive strategy on the store brand market share
Table 3 shows the value of the store brand market share, in volume, for the first and last year of
the analysis, the average for the seven years, the standard deviation and the variation undergone
between the first and last year in percentage points. Reading the table reveals significant
differences in both magnitude and evolution for all the categories combined.
Table 3. Store brand market share, in volume, per product category (1997-2001)
The store brand market share of mass consumption products grew 7.83 percentage points
(34.31%) between 1997 and 2001. This phenomenon occurs differently according to the product
category. Although in all except paper tissues, liquor, domestic glo ves and canned mussels, the
store brand market share increased, the growth was especially pronounced in the product
categories of canned pineapple, softeners, insecticides, juices and automatic dishwasher
detergents, all of these experiencing increases greater than 15 percentage points.
The average store brand market share for all the categories and years was 25.87%, with a
standard deviation of 11.96. The product categories with greater average store brand market share
were: aluminium foil (with a market s hare greater than 50%), canned corn, canned pineapple and
toilet paper (with an average market share greater than 40%), dry packaged legumes, domestic
napkins, paper towels, natural tomato sauce, domestic gloves, prepared dishes, marmalade and
softeners (with a market share greater than 35%).
In contrast, the products with lower average store brand market share were: deodorants and
toothpaste (with an average market share of less than 10%), whisky, mineral water, shampoo,
dehydrated soups and diapers (with market share lower than 15%).
The product categories with higher levels and better evolution of store brand market share seem
to have, at least, one of the following characteristics: the absence of strong brand leaders; lower
economic, functional and emotional risk as perceived by the consumer; and a very low level of
communication and technological innovation.
4.2. Effect of the market structure on the store brand market share
Table 4 shows the effect of the market structure variables on the store brand market share. For
each of the years analyzed, we applied a multiple regression, in which we consider the store
50
brand market share as the dependent variable and the variables related to price elasticity of
demand (ELST), competitive rivalry among retailers (DPSALES) and competitive structure at the
manufacturer level (CR3MB, DPCR3MB) as the independent variables.
Table 4. Market structure variables conditioning the store brand market share. Years 1997-
2001
The explanatory variables considered explain 35% of the variation in store brand market share in
1997 and 49.1% in 2001. All the variables except competitive rivalry among retailers are
significant in all the years analyzed.
We see how more price elastic categories have a greater store brand market share (H1), which
seems to indicate that price is an important incentive in the choice of a brand in mass
consumption products. Another variable that contributes positively to the store brand market
share is the competitive rivalry among retailers (H2). The retail competition favours the
distributor's management of its own brands, which ultimately contributes to the market share of
these brands. Further, we see clearly that the effect of the retail competition occurs within a
concentrated sector. Thus, in the Spanish market of mass consumption products, according to the
data from Alimarketi, the superstores, supermarkets and discount stores belonging to the four
leading retail chains monopolize a considerable and increasing percentage of sales for the period
of the ana lysis. Specifically, the percentage rises from 36.14% in 1997 to a figure of 44.38% in
2001. This volume of sales confers considerable power on the retail sector, which enables it to
negotiate better manufacturing agreements for store brands, which in turn benefits the market
share of these brands.
In contrast, store brands show a more complicated development in product categories in which
there is a greater manufacturer brand concentration (H3) and a strong competitive rivalry among
the leading manufactur er brands (H4). Brands with high market power give their provider greater
negotiating power in the channel. The provider can use the mentioned power to improve the
management of its brands in the establishment. Further, on the same concentration, the greater the
homogeneity of the manufacturer brand market shares, the smaller the consumer's surplus derived
from the acquisition of store brands.
4.3. Effect of the competitive strategy on the store brand market share
Next, we examine the extent to which the strategies of differentiation, innovation and promotion
most often followed by manufacturers are effective in the reduction of the store brand market
share. To do this, we perform a first analysis of the individual effects of each of these variables
on the store brand market share in the product categories of mass consumption, for which we
evaluate the effect of the structure market variables during 2001, the year in which we performed
the survey to manufacturers (Table 5).
Table 5. Relation of the manufacturer's competitive strategy to the store brand market share
The results show a significant effect of all the variables considered. We see the effectiveness of
the strategies that give the manufacturer brands an image of better quality -differentiation and
innovation- and of the promotion strategies designed to offer greater value not directly linked to
lower price -special pack promotions-. However, we obtain a positive effect of price reduction
promotions in the store brand market share.
The manufacturer can increase the market power of its brands by developing advertising
strategies that increase their differentiation. The advertising investment enables the manufacturer
51
to increase the distance of its manufacturer brands with respect to the store brands and to
contribute negatively to the market share of these latter brands (H5).
As an indicator of the innovation present in the product category, we used an output variable,
specifically the number of product references existing in the superstores, since this is the
commercial format with the greatest product variety per category. The results show that the
manufacturer can invest in new and improved products to improve the market share of its
manufacturer brands to the detriment of store brands (H6).
As to promotio ns, the information source used to measure their effect (IRI) distinguishes between
indirect price promotions, specifically special pack promotions (PROMSP) and direct price
promotions (PROMPR). We see that indirect price promotions influence negatively the store
brand market share, as opposed to the direct price promotions (H7). The result obtained alerts the
manufacturer to the risk of direct price promotions for its brands. Price reduction promotions
increase the consumer's sensitivity to the prices of the brands that compose the product category,
favouring the store brand market share.
All these variables considered together explain 43.1% of the store brand market share. All of
them are significant variables except advertising investment, due to problems of
multicollinearlity with innovation (Table 5); the Pearson's correlation coefficient between both
variables is 0.536. To avoid problems of multicollinearlity in the series of original variables, we
perform an analysis of principal components to the comp etitive strategy variables. This analysis
shows the existence of two factors. The first one is competitive positioning based on an image of
superior quality, with the variables of differentiation and innovation; the second one is value,
with the variables of promotion, in which price promotion has a higher loading and a sign
contrary to special pack promotion. Two factors, image of higher quality and value, explain 70%
of the total variability of the original variables and 38.1% of the variance of the store brand
market share.
Concerning this point, we should remember that in 2001 the structural market variables explained
49% of the variance of the store brand market share. To analyze the percentage of variance not
explained by the structural market variables, we performed a regression using as dependent
variable the errors obtained for this year and as independent variables the two main components
that represent the manufacturer's competitive strategy. The results obtained, presented in Table 5,
show that competitive strategy adds 24.5% to the explanation of the store brand market share. It
is possible to observe the negative effect of the image of superior quality of manufacturer brands
on the store brand market share and the positive effect of value.
5. CONCLUSIONS, LIMITATIONS AND FUTURE RESEARCH

The store brand market share is conditioned by the market structure variables of price elasticity of
demand, retailers´ competitive structure, and competitive structure at the manufacturer level.
Store brands obtain a higher market share in price elastic categories. The positioning of store
brands has traditionally been marked by low prices, comparatively lower than those of
manufacturer brands. In price elastic categories attributes, such as quality, are relegated to second
place in favour of price, which explains the greater acceptance of the store brands in these
categories. Hoch and Banerji (1993) signal the importance of the quality of store brands to their
development, while they also indicate that in markets wit h relatively unsophisticated
technological production processes, as is the case of the great majority of mass consumption
52
markets, store brands present a quality similar to those of manufacturer brands, a fact that seems
to be recognized by consumers given the market share these brands have achieved in a wide
number of products.
The store brand market share is favoured by the levels of retail rivalry. The store brands are
commercialized by self service formats which monopolize a significant percentage of the sales of
mass consumption products. The concentration of these establishments together with the rivalry
among them gives a high negotiation power to retailers in their relationship with manufacturers.
Retailers can use this negotiating power to achieve better store brands that incorporate higher
standards of quality and that share the innovations that the producer incorporates into its
manufacturer brands. Further, the retailer can use its negotiating power to achieve lower list
prices in brands that it commercializes in its establishments (Narasimhan and Wilcox, 1998) and
thus gain a greater manoeuvring margin for operating with the price differential between
manufacturer and store brands in order to favour the market share of its own brands.
The negotiating power of retailers can be compensated in the product categories dominated by
manufacturers of strong brands. Here, the manufacturer's power vis à vis that of the distributor
will be greater, the higher the concentration of manufacturer brands in the category and if there
are several manufacturer brands that compete intensely for the leadership position. A
manufacturer brand with market power gives the producer greater power to fix its sale price and
negotiate better merchandising agreements in the establishment. In markets with intense
competitive rivalry among manufacturer brands that monopolize a significant market share, each
manufacturer attempts to maintain and even increase the market share of its brands at the expense
of competitor brands, so it is very probable that these markets are characterized by higher
research and development expenses, greater proliferation of products, significant advertising
investments, and aggressive price policies, factors all of them that act to the detriment of the store
brand market share.
Thus, the market structure conditions the development of store brands to a great extent, although
it does have a limit, according to Quelch and Harding (1996), in the necessary coexistence of
store and manufacturer brands on the market. From the consumer's perspective, the products with
brand recognition enjoy a solid base on which they construct their competitive advantage.
Manufacturer brands represent a guarantee of quality that is a key discriminating factor in the
purchase choice when consumers do not have time, opportunity or ability to examine the different
alternatives offered at the point of sale. From the distributor's perspective, manufacturer brands
enjoy a value that discourages commercial establishments from abandoning the
commercialization of certain manufacturer brands that consumers wish to find in the shelves.
Even if the distributors can obtain greater benefits per unit on the store brands, these brands, as
opposed to the manufacturer brands, do not have the ability to generate traffic in the
establishment.
In the research performed, we show the effectiveness of the strategies commonly used by
manufacturers -differentiation, innovation and promotion- to strengthen their brands against the
development of store brands. Product categories in which manufacturers invest in brand
differentiation and innovation achieve worse store brand market share, which suggests that it is
through these strategies that manufacturers are able to communicate an image of superior quality
of its brands to the consumer, motivating the choice of manufacturer brands over store brands.
However, the strategy of increasing sales promotions is not recommended in all cases, as we can
see in the different effects according to the kind of promotion. Thus, the results of this study warn
53
the manufacturer about the increase of consumer´s price sensibility associated with direct price
promotions, and consequently about the positive effect of direct price promotions on the store
brand market share. Indirect price promotions constitute a more recommended policy of action
for granting manufacturer brands greater value, since they enable these brands to maintain their
competitive advantage on the store brands.
The research performed is not exempt from limitations that should be considered in future
research. On the one hand, we should consider the effect of other variables of market structure
and of the manufacturer's competitive strategy on the store brand market share, in addition to
those studied. Among the market structure variables, we can emphasize market growth or
coverage of store brands. Among the variables of competitive strategy, it would be useful to
obtain information that would permit us to analyze the effect on store brand market share, of
some of the strategies indicated by manufacturers to defend their brands. This study shows, for
example, the use of negotiating power on the part of the manufacturer when it possesses a strong
brand -a strategy questioned by authors such as Kumar (1996)-, the launching of a second
manufacturer brand that competes in price with store brands (Hoch, 1996; Quelch and Harding,
1996; Recio and Román, 1999), and the providing of incentives to the distributor to avoid its
entering into competition, by offering the distributor exclusive control of a brand, financial,
commercial or marketing advice.
On the other hand, this study analyzed only the direct effect of market structure and
manufacturer's competitive strategy on the store brand market share. The number of product
categories for which information is available does not allow the consideration of more complex
models that include direct and indirect effects in the explanation of the dependent variable. Future
research should consider the effect of structure-competition interaction in the development of the
store brand market share.
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TABLES
Table 1. Strategies adopted against store brands
Strategies adopted against store brands N Valid %

Increase of advertising investment 43 56.58
Development of category management 35 46.05
Increase of research and development investment 28 36.84
Increase of sales promotions 23 30.26
Positioning in high price 20 26.32
Reinforcement of other channels 19 25.00
Use of negociating power from my leading manufacturer
brand 14 18.42
None especially 10 13.16
Introduction of a cheaper second manufacturer brand 5 6.58
Financial or commercial consultancy to the retailer 4 5.26
Total 76 100
56
Table 2. Hypotheses, measurement of variables and expected signs

Variable Description Expected effect on
store brand
market share
Store brand market share Aggregate volume market share for store brands
(SBMS)
Price elasticity of demand Average variation of the volume sales in the product category when the H1 (+)
(ELST): H1 average prices are modified
Competitive rivalry among Dispersion of volume market shares by the retail formats that market store H2 (+)
retailers (DPSALES): H2 brands (inverse indicator of the competitive rivalry)
Concentration of Aggregate volume market share for the top three manufacturer brands H3 (-)
manufacturer brands
(CR3MB): H3
Competitive rivalry among Dispersion of volume market shares for the top three manufacturer brands H4 (-)
manufacturer brands in the product category (inverse indicator of the rivalry intensity)
(DPCR3MB): H4
Differentation of Advertising expenditures for all the manufacturer brands in the category in H5 (-)
manufacturer brands relation to total advertising expenditures for all the manufacturer brands in
(ADVERT): H5 the consumer goods market.
Innovation in the product Average number of product references in the superstore H6 (-)
category (REFSST): H6
Promotional activity Percentage of value sales in price promotion –PROMPR- and in special H7 (- indirect price
(PROMPR/PROMSP): H7 pack –PROMSP-) primotions)
Table 3. Store brand market share, in volume, per product category (1997-2001)a
Product Mean S.D. Var. P.P. Product Mean S.D. Var. P.P.
category 1997 2001 (97- 01) (97- 01) (97-01) category 1997 2001 (97- 01) (97- 01) (97-01)
AIRFRSH 17.00 18.40 16.84 1.59 1.40 MARMAL 30.50 41.90 36.14 4.87 11.40
ALMFOIL 54.50 65.60 58.32 5.52 11.10 MAYONN 17.60 23.20 19.64 2.47 5.60
ASPARA 28.00 39.90 34.84 4.50 11.90 MILK 20.00 25.30 22.64 2.00 5.30
AUTDW 24.90 40.10 32.54 6.07 15.20 MUSSELS 20.90 20.50 20.48 1.72 -0.40
BATHGEL 17.50 21.00 17.36 2.35 3.50 NAPKINS 33.70 44.40 39.32 4.86 10.70
BLEACH 23.20 30.30 24.84 3.50 7.10 OLIVOIL 22.10 33.40 27.64 5.03 11.30
CCOSPRE 25.80 33.20 29.78 3.66 7.40 PASTAS 33.20 38.60 34.64 2.36 5.40
CHOCBAR 16.00 23.00 20.28 2.96 7.00 PINEAPP 37.30 58.70 46.38 9.07 21.40
COOKIES 16.50 23.30 20.08 2.89 6.80 PREDISH 30.40 41.20 36.56 4.16 10.80
CORN 40.80 53.90 47.68 5.46 13.10 RICE 27.30 38.30 32.96 4.97 11.00
DEODOR 3.60 7.80 5.34 1.69 4.20 ROASCF 17.10 22.90 20.58 2.56 5.80
DETERG 14.30 22.90 16.26 3.88 8.60 SCOPAD 15.90 24.50 17.52 4.58 8.60
DIAPERS 12.50 21.50 14.88 3.93 9.00 SHAMPOO 10.80 14.80 11.70 1.86 4.00
DOMGLOV 30.10 37.70 36.80 2.33 -1.40 SLICEBR 28.00 33.80 29.80 4.50 5.80
DUSTPAD 13.60 24.90 16.34 5.29 11.30 SOFTNER 26.40 44.10 35.78 6.83 17.70
FHGROD 17.50 20.30 17.52 1.93 2.80 SOUP 8.30 16.20 11.88 3.18 7.90
FLOORCL 32.20 37.40 34.30 2.01 5.20 TISSUES 44.10 32.60 33.02 7.44 -11.50
FLOORRF 13.80 23.50 17.46 4.14 9.70 TOILPP 38.20 48.70 40.90 4.79 10.50
HANDDW 14.60 28.60 18.02 6.31 14.00 TOMSC 33.50 44.60 38.06 5.29 11.10
INSCOFF 23.30 24.90 24.44 0.96 1.60 TOOTPS 7.20 12.50 9.00 3.26 5.30
INSECT 8.80 24.40 16.82 6.02 15.60 TOWELS 36.50 44.40 38.52 4.07 7.90
JUICE 21.30 36.70 27.42 6.81 15.40 TUNE 16.60 30.20 22.12 5.58 13.60
LEGUM 31.00 45.80 39.64 6.11 14.80 WATER 10.30 15.90 11.64 2.44 5.60
LIQUOR 23.60 18.90 20.24 1.99 -4.70 WHISKY 9.90 12.20 10.68 1.75 2.30
MARGAR 17.20 20.30 19.42 1.70 3.10 YOGUR 13.00 23.50 18.40 4.08 10.50
TOTAL 22.79 30.61 25.87 11.96 7.83
57
a
The descriptive table contains the market share data of the store brands by volume, referenced to the first and last year of
analysis, the average values (Mean 1997 to 2001) and the standard deviation (S.D. 1997 to 2001) in the five-year period of study.
Moreover, the variation experienced by the variable between the first and last year is specified. This variation is expressed by
percentage points (Var. P.P. 1997-2001) with respect to the first year.
Table 4. Market structure variables conditioning the store brand market share. Years 1997 - 2001
Explanatory variables 1997 1998 1999 2000 2001
CONSTANT 28.492 32.137 34.885 34.086 41.092
(6.354)*** (6.791)*** (7.104)*** (6.812)*** (7.626)***
ELST -0.918/ -0.279 -1.100/ -0.293 -1.171/ -0.300 -1.536/ -0.390 -1.483/ -0.351
(-2.248)** (-2.475)** (-2.664)** (-3.123)*** (-2.875)***
DTCVOL -0.450/ -0.185 -0.457/ -0.162 -0.808/ -0.252 -0.813/ -0.236 -1.011/ -0.247
(-1.506) n.s. (-1.376) n.s. (-2.273)** (-1.920)* (-2.080)**
CR3MB -0.287/ -0.504 -0.353/ -0.539 -0.344/ -0.503 -0.334/ -0.465 -0.403/ -0.513
(-3.961)*** (-4.433)*** (-4.457)*** (-4.040)*** (-4.637)***
DPCR3MB 11.283/ 0.432 12.465/ 0.436 12.517/ 0.432 12.136/ 0.414 12.775/ 0.430
(3.431)*** (3.649)*** (3.910)*** (3.668)*** (4.048)***
R2 Adjusted 0.348 0.404 0.459 0.439 0.491
F-Snedecor 7.536*** 9.308*** 11.385*** 10.601*** 12.821***
Non standardised coefficients /standardised coefficients. t-ratios in parentheses. Significant at ***1%, **5% and *10%.
Table 5. Relation of the manufacturer's competitive strategy to the store brand market
share
Multiple regression Multiple regression
Principal components analysis DEPEND: DEPEND:
DEPENDIENTE: SBMS
SBMS ERRORS
FACTOR 1: Explanatory
Explanatory FACTOR 2:
2001 2001 IMAGE OF variables 2001 2001
variables VALUE
HIGHER QUALITY
CONSTANT 22.287 22.910 CONSTANT 24.654
(4.682)*** (5.541) (19.189)***
ADVERT 0.217/ 0.050 0.825 -0.226
(.276)n.s. FACTOR 1:
HIGH -3.735/ -0.376 -3.623/ -0.457
REFSST -0.142/ -0.460 -0.131 /-0.424 0.915 0.137 QUALITY (-2.868)*** (-3.201)***
IMAGE
(-2.473)** (-3.205)***
PROMPR 2.026/ 0.458 1.920 / 0.434 0.092 0.902
(2.845)*** (3.251)*** FACTOR 2: 5.197/ 0.523 2.216/ 0.279
PROMSP -0.534/ -0.303 -0.561 /-0.319 0.126 -0.609 VALUE (3.990)*** (1.958)*
(-2.098)** (-2.418)**
% EXPLAINED VARIANCE:
R2 Adjusted 0.431 0.447 R2 Adjusted 0.381 0.246
69.923%
F-Snedecor 7.814*** 10.692*** F-Snedecor 12.070*** 7.040***
Non standardised coefficients /standardised coefficients. t-ratios in parentheses. Significant at ***1%, **5% and *10%.
58
APPENDIX
Table 1. Nielsen classification of product categories
Product category Description Product category Description

AIRFRSH Air fresheners MARMAL Marmalade
ALMFOIL Aluminum foil MAYONN Mayonnaise
ASPARA Preserved asparagus MILK Milk
AUTDW Automatic dishwasher MUSSELS Canned mussels
detergents
BATHGEL Bath gel NAPKINS Domestic napkins
BLEACH Bleach OLIVOIL Olive oil
CCOSPRE Cacao spreads PASTAS Pastas
CHOCBAR Chocolate bars PINEAPP Canned pineapple
COOKIES “María” cookies PREDISH Prep ared dishes
CORN Cannes corn RICE Packaged rice
DEODOR Deodorants ROASCF Roasted coffee
DETERG Detergents SCOPAD Scouring pads
DIAPERS Diapers SHAMPOO Shampoo
DOMGLOV Domestic gloves SLICEBR Sliced bread
DUSTPAD Dust pads and wipes SOFTNER Softeners
FHGROD Feminine hygiene SOUP Dehydrated soups
products
FLOORCL Floor cleaner TISSUES Paper tissues
FLOORRF Floor cleaner refills TOILPP Toilet paper
HANDDW Hand dishwashing TOMSC Natural tomato sauce
detergents
INSCOFF Instant coffee TOOTPS Toothpaste
INSECT Insecticides TOWELS Paper towels
JUICE Juices TUNE Tuna
LEGUM Dry packaged legumes WATER Mineral water
LIQUOR Liquors WHISKY Whisky
MARGAR Margarine YOGUR Yogurts
59

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Volume 1: June, 2005

Title Authors Page

THE EFFECT OF PRICE PROMOTIONS ON THE

SARA CAMPO MARTÍNEZ1

3. HYPOTHESES FOR THE STUDY

4. METHODOLOGY OF THE STUDY

Measurement of the tourist's satisfaction was performed by following the methodolo gy of Oh

6. CONCLUSIONS, LIMITATIONS AND FUTURE LINES OF RESEARCH

Andreu, L. (2001). Emociones y satisfacción del consumidor: propuesta de un modelo Cognitivo-

Campo, S. (2004). Las promociones en precios en el mercado turístico: Efectos sobre la

Oliver, R. L. (1997). Satisfaction: A behavioral perspective on the consumer. McGraw-Hill,

Szymanski, D. M., and Henard, D. H. (2001). Customer satisfaction: A meta-analysis of the

Yen-Lun, A. (2004). Customer satisfaction measurement practice in Taiwan hotels. International

Table 1. Measurement of the latent variables

RETAIL PRICE DISPERSION: SPATIAL AND

IGNACIO CRUZ ROCHE

2. CONCEPTUAL FRAMEWORK AND HYPOTHESES

2.1 Horizontal competition and price level

2.2. Vertical competition and price level

2.3. Environment and price level

P = f ( CH, CV, CE, EC)

As to vertical competition, in categories in which the manufacturers have greater relative

4.2. Model for fresh products

In this model, hypothesis 5 is confirmed because multimarket competition also continues to

Criner, G. K., Kezis, A. S. y McLaughlin, E. W. (1997). Princing dynamics in fresh produce

Cruz, I. (coord..). Los canales de distribución de productos de gran consumo: concentración y

González-Benito, O., Muñoz-Gallego, P. and Kopalle, P. K. (2005). Asymmetric competition in

Santos, L. (1997). Componentes del margen minorista. Revista Española de Investigación de

Sivakumar, K. (2003). Price-tier competition: distinguishing between intertier competition and

Yagüe, M. J. (1995). Relación entre concentración y precios en el comercio minorista.

Table 5: Estimates of coefficients and t-values of the price equation

THE EFFECT OF USAGE SITUATION ON

2. USAGE SITUATION AND ATTITUDE FORMATION

Note: See appendix in the word document E-1

Note: See appendix in the word document E-2

3. METHODOLOGY TO CONSTRUCT A USAGE SUITABILITY INDEX

5. MANAGERIAL IMPLICATIONS AND CONCLUSIONS

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PRODUCTS USAGE SITUATIONS

- Bathroom gel with bleach - Wood surfaces and floors

Table 2. Suitability indexes

PRODUCT SWF SOF STL SBF SKA SHF SGS

Table 3: Choice model coefficients

Table 4: Regression Model

SWF SOF STL SBF SKA SHF SGS

Liquid 64,08 23,70

IMPLEMENTATION OF STORE BRANDS AND

Table 1. Strategies adopted against store brands

5. CONCLUSIONS, LIMITATIONS AND FUTURE RESEARCH

Strategies adopted against store brands N Valid %

Table 2. Hypotheses, measurement of variables and expected signs

Product category Description Product category Description