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Antitrust Law Journal

Volume 83, Issue 3

The Competitive Implications of Private Label Mergers

Matthew Schmitt and Loren Smith

Summary

  • Private label manufacturers compete in two ways: (1) to become a retailer’s private label product supplier and (2) against other items on the retail shelf, such as the branded products that private labels often seek to emulate.
  • Considering both stages at which private label products compete can have a large impact on the antitrust evaluation of private label mergers.
  • Depending on the strength of downstream competition, even mergers that consolidate a significant proportion of private label industry sales can be procompetitive with only modest cost efficiencies.
The Competitive Implications of Private Label Mergers
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In 2019, private label products generated an estimated $180 billion in U.S. retail sales. Private labels are generally the cheapest option available, which is particularly appealing to price-sensitive shoppers seeking a lower-priced alternative to major national brands. In recent years, several proposed and consummated mergers between private label manufacturers have raised questions about the proper antitrust evaluation of such mergers. In December 2019, for instance, the Federal Trade Commission filed a complaint challenging the acquisition of TreeHouse Foods’ private label ready-to-eat cereal business by Post Holdings, claiming that the acquisition would “eliminate the vigorous competition between them to serve grocers across the country.”

The antitrust analysis of private label mergers is complicated by the distinct, yet interrelated, stages at which private label products compete to make sales. First, private label manufacturers compete to become a retailer’s private label product supplier (e.g., via an RFP process). Second, the private label product chosen by the retailer competes against other items on the retail shelf, in particular, against branded products that private labels often seek to emulate. When negotiating wholesale prices with retailers, private label manufacturers must consider both stages of competition: A higher wholesale price may lead the retailer to choose a different private label supplier in the first stage. Because wholesale prices are an input cost to retailers—and therefore generally affect retail prices—a higher wholesale price may also lead to a higher retail price and thus fewer private label sales in the second stage. The constraint imposed on private label wholesale prices by this second stage of competition—the need for the private label product to be priced competitively on the retail shelf—is not directly affected by a merger between private label manufacturers. Therefore, the antitrust evaluation of such mergers must assess the relative importance of the competitive constraints imposed by both (1) upstream competition between private label manufacturers to become a retailer’s private label supplier, and (2) downstream competition on the retail shelf.

In this article, we show how existing methods for assessing the likely competitive effects of horizontal mergers can be extended to the private label merger context. The central result of our analysis is that considering both stages at which private label products compete can have a large impact on the antitrust evaluation of private label mergers. Specifically, our upward-pricing pressure and merger-simulation analyses demonstrate that smaller marginal cost efficiencies are typically needed to generate net downward pricing pressure post-merger compared to the prototypical case in which firms sell directly to end consumers. Therefore, the task of quantifying merger-specific cost efficiencies and weighing them against the loss of competition from the merger arguably takes on a heightened importance when assessing private label mergers. Depending on the strength of downstream competition, even mergers that consolidate a significant proportion of private label industry sales can be procompetitive with only modest cost efficiencies.

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Dr. Smith and Dr. Schmitt were retained by Post’s and TreeHouse’s outside antitrust counsel to provide analyses to the FTC during the investigation of the proposed Post/TreeHouse transaction. The authors acknowledge the James M. Kilts Center at the University of Chicago Booth School of Business for providing the data used in the article. The opinions expressed are those of the authors and do not necessarily represent those of their employers, clients, or affiliated organizations. 

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