What Can the Price Gap between Branded and Private-Label Products Tell Us about Markups?

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Abstract
This chapter utilizes an original data set that combines retail and wholesale data for a grocery store chain. The nature of manufacturing by copackers and its implications for marginal costs is then addressed. It is noted that marginal costs for private-label products are at least as high as—and in many cases higher than—marginal costs for the national brands with which they are paired. There is sufficient data to show that using private-label product prices to deduce national brand costs is a reasonable assumption in this industry. The retailer's markup on the national brand systematically exceeds its markup on the private label. It is also supposed that the products with the lowest markup ratios, such as canned tuna, frozen entrees, cheese, frozen juice, and bottled juice, have the highest share of materials. The data reveal that markups on nationally branded products sold in U.S. supermarkets are large.

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