In most supermarkets in the U.S., consumers are given the option of purchasing name brand products...

In most supermarkets in the U.S., consumers are given the option of purchasing name brand products or store brand products. The name brand products are always priced higher than the store brand products, but in taste or quality tests, there is typically little to no difference between the two types. In fact, many store brand products are actually produced by name brand producers, but sold with the store’s label at a lower price.

a) Suppose the store brand and the name brand for a product, bread, for example, are made by the same producer and are identical in every way except for the label and price. The price of the store brand is significantly less than the name brand. Why would any consumer purchase the name brand?

b) What do you think has happened to the market shares of store brand products over the past 10 years? Why has this happened?

c) Consumer name brand products spend more than $20 billion/year on media advertising. Are these advertising expenditures wasteful from society’s perspective? Do consumers receive any benefits from this form of product differentiation?

Expert Solution

a) Consumers purchase name brand one because of preference and brand recognition . Some people feel that a particular brand they have been consuming is of higher quality and worth the extra penny . Also such brand preference is created by advertisements , attractive packaging etc .

b) Market shares of store brand products has decreased because there are many name brand products that produce slightly differentiated products and also allure consumers through advertisements and other attractive offers and packaging . Also due to high competition in name brand market the price has come down too .

c) Yes from society's perspective they are wasteful since they could have been used for more production and which could have led to more employment and economic growth . Also advertisement means waste of resources which is detrimental for society .

Consumers receive only one benefit that is each producer not only spends on advertisement but also spends on quality and technology of production to create this differentiation .

Rahul Sunny answered 1 year ago

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