Is product with a special feature still rewarding? The case of the Japanese yogurt market

Abstract

Manufacturers of packaged consumer goods strive to develop a new product with a special feature that could provide additional value to consumers. However, it is less clear whether such an effort is still rewarding in terms of margin if manufacturers are losing power to retailers as some have argued. To investigate this issue, we conduct an economic analysis in the Japanese yogurt market incorporating strategic interaction between manufacturers and a retailer as well as between manufacturers by extending the framework employed in the earlier literature to suit the retailer Stackelberg game which can reflect the possible power shift from manufacturers to retailers. We find (1) the manufacturers’ margins on special featured brands are larger than those on the others; (2) however, the manufacturer producing such brands is not able to leverage these brands to exert bargaining power over the retailer; and (3) the retailer obtains as large margins as the manufacturers on these brands. In the course of this research, we successfully portray the symmetrical relationship between manufacturer and retailer Stackelberg games, whereby the vertical Nash game is located in the midpoint of those two games.

Keywords

• consumer heterogeneity
• state dependence in demand
• horizontal strategic interaction among manufacturers
• vertical strategic interaction between manufacturers and retailers
• forward-looking behavior of firms