[arrosenberg]

> If you want to talk about vertically aligned retail giants producing store brands, it would be very helpful for you to understand that retailers like Walmart and Target are not vertically aligned and do not produce their own store brands. They buy them as white label products from other companies, most of whom make the name-brand products that appear in their stores alongside the store brands.

This is a distinction without a difference. The mere fact that they don't own the factory producing the goods doesn't change the fact that they are acting as both producer and distributor in the same marketplace. If Costco buys bottled water from Nestle they are only a distributor, and there is no conflict of interest. When they put Kirkland Signature water on the shelf next to it, there is a pretty clear conflict of interest that allows Costco to leverage it's power as a distributor into pricing power against producers. Additionally, there is only a single buyer for the product line, regardless of whether the producer is legally independent. This is a vertically aligned operation - if Costco stopped selling Kirkland Signature tomorrow, it would cease to exist. The fact that they are buying the store brand products from the same producers who make the name brand product makes the entire operation look more aligned and concentrated, not less.

> The second half of that statement is false ("in order to..."), and demonstrates a fundamental misunderstanding of how the retail market works. Product manufacturers derive their profits from selling to retailers not to end customers. They sell their goods at "wholesale prices" that are far below what the end customers pay. The wholesale prices for store brand products are generally the same or close to the same as the price of name-brand products.

Don't be patronizing. The entire dynamic as it exists gives chain stores negotiating leverage against those name-brand products, allowing them to get better prices on goods than a smaller, independent operator would be able to get. That is price discrimination, and it's why small businesses in the US are getting killed and big, consolidated corporations keep getting larger.

[gamblor956]

This is a distinction without a difference. The mere fact that they don't own the factory producing the goods doesn't change the fact that they are acting as both producer and distributor in the same marketplace.

This is a huge distinction. They don't simply not own the factory, they don't produce the goods under any legal definition of the term. Nor are they a distributor under the legal definition of the term; they are a retailer which has specific and different legal meaning. (A distributor sells products or other parties that sell to end-customers. The manufacturer is usually the distributor of its own products.)

If Costco buys bottled water from Nestle they are only a distributor, and there is no conflict of interest. When they put Kirkland Signature water on the shelf next to it, there is a pretty clear conflict of interest that allows Costco to leverage it's power as a distributor into pricing power against producers.

No, it doesn't. Costco pays Nestle or one of Nestle's competitors for Kirkland Signature water. Absolutely none of the Kirkland Signature products are made by Costco itself other than the assembly of food in the food court.

Additionally, there is only a single buyer for the product line, regardless of whether the producer is legally independent. This is a vertically aligned operation - if Costco stopped selling Kirkland Signature tomorrow, it would cease to exist.

Note: by vertically aligned you actually mean "vertically integrated" (and I should have edited my earlier comment to correct the terminology). A vertically integrated company must own at least two of the following levels: the suppliers, distributors, or retailers of its products. (If it is a retail company, that would mean it needs to own one of the other levels of companies to be vertically integrated.)

The fact that they are buying the store brand products from the same producers who make the name brand product makes the entire operation look more aligned and concentrated, not less.

No, it's exactly backwards. The manufacturers don't just sell to Costco. They sell to other retailers as well. Vita Coco, for example, sells white-label coconut water to both Costco and Kroger (i.e., Ralphs), among other retailers. (Vita Cocoa used to be a client of mine.)

The entire dynamic as it exists gives chain stores negotiating leverage against those name-brand products, allowing them to get better prices on goods than a smaller, independent operator would be able to get.

Yes, that is how market power works. A participant with greater market power can use that as leverage to negotiate pricing. This is an acceptable use of market power; for example, it is the basis behind insurance pools, coops, group discounts, etc.

It would not be acceptable if the big retail chain used its market power to effect how a supplier deals with other parties or in other markets, such as by attempting to restrict a supplier from selling to competitors. (But note: exclusives are fine, so long as the exclusive product is not a condition of, or conditioned upon, restrictions on the sale of non-exclusive products, because a manufacturer can simply refuse exclusivity and offer it to competitors exclusively or non-exclusively or can negotiate the terms of the exclusive product with the retailer before them. See, for example, Orgain's nut-based protein powder, or the myriad models of TVs that are "exclusive" to each retailer.)

[arrosenberg]

However you want to define it, store brands in the current environment are being used to play pricing games. Perhaps it makes more sense to say that retailers are a participant and beneficiary of the bad behavior of whoever is selling the water to both Costco and Nestle.

In either case, it gives companies like Costco/Walmart/Target the ability to gain greater market share in ways that aren't accessible to small businesses. If you don't mind economic concentration, I can see why this wouldn't seem like an issue to you. I believe that America functions best when wealth and economic activity are geographically well distributed, and when individuals have greater control over their own ability to be productive. That means diminishing chain retailers and giving more agency to individual retailers. Pricing games are the number one way that retail chains are able to drive small, local retailers out of business — they've been doing it with varying levels of success for over 100 years.

> Yes, that is how market power works. A participant with greater market power can use that as leverage to negotiate pricing. This is an acceptable use of market power; for example, it is the basis behind insurance pools, coops, group discounts, etc.

That's not an acceptable use of market power. It specifically disadvantages small businesses that do not have access to private label brands. It's a competitive advantage exclusive to chain stores that allows them to engage in discriminatory pricing games. Employer healthcare also creates an anti-competitive advantage for larger companies for the same reason, but that's a separate issue.

[gamblor956]

You are basing your arguments on a view of market power that has never existed in the U.S.

That's not an acceptable use of market power. It specifically disadvantages small businesses that do not have access to private label brands.

Small retailers can also have private label brands. Many do. There are a great many suppliers, large and small, to service all retail market niches. Gelson's, for example, is a CA grocery chain with 27 stores. It has its own store brand.

Most small stores and chains don't have store brand products simply because it's not worth the costs. With a store brand, the store is on the hook for all marketing spend, and that's in addition to the money they spend on the inventory itself, which generally isn't materially cheaper than brand name products purchased at wholesale.

And customers don't go to a store for the store brand products (Costco aside), they go for the name brand products like Coke and Nabisco. Do you honestly believe companies spend billions on marketing for nothing?

Employer healthcare also creates an anti-competitive advantage for larger companies for the same reason, but that's a separate issue.

Employer healthcare is a product of the world war ii wage controls that has survived due to favorable tax treatment. Small companies can also offer health care, and many do without issue.

That means diminishing chain retailers and giving more agency to individual retailers.

Do you know why chain stores are successful? It's because their market power allows them to acquire products cheaper from suppliers, which lets them sell those products for cheaper than smaller stores. Lower costs = lower prices = customers benefit. It's silly to say that we need the small store to survive if it sells product X for more than the chain store without offering any other benefit than merely providing the product.

Small/indie stores have survived in the markets where factors other than pricing drive customer purchasing decisions, such as apparel, recreational outdoor equipment, restaurants, etc.

[arrosenberg]

> Do you know why chain stores are successful? It's because their market power allows them to acquire products cheaper from suppliers, which lets them sell those products for cheaper than smaller stores. Lower costs = lower prices = customers benefit. It's silly to say that we need the small store to survive if it sells product X for more than the chain store without offering any other benefit than merely providing the product.

Which is exactly why we have laws on the books from the era when my theory of market power never existed.

Low price = customer benefit isn’t written in stone, except on Robert Bork’s grave.

Customers benefit from a fair distribution of economic activity also, it’s just harder to quantify. Unfortunately some unscrupulous economists have used that fact to push pro-concentration policies.