Economic Perspectives on Category Management

• Pages: 13-28

13

CHAPTER II

ECONOMIC PERSPECTIVES ON CATEGORY

MANAGEMENT

This chapter provides an economic overview of category

management, with a focus on the use of category captains. It discusses

the appropriate measure of competitive performance, assesses the general

nature of competition in retail markets, explains both the efficiency-

enhancing and possible anticompetitive effects of category captains, and

examines how empirical analysis can attempt to identify when a category

captain’s practices are on balance procompetitive or anticompetitive.

This overview provides the necessary economic foundation for the

antitrust analysis of category management practices, which is discussed

in Chapter III.

A. Category Management vs. Brand Management

As discussed in Chapter I, category management is sometimes

compared to the earlier approach of brand management. In both

approaches, the retailer’s over-arching objectives are the same—namely,

to offer products that consumers want to buy, display them in ways that

lead consumers to purchase them, and price them at levels that result in

maximum profits. A retailer that practices brand management takes a

narrower focus with respect to pricing and other competitive decisions

than one that practices category management. Given the narrower focus,

antitrust concerns are less likely when a retailer makes brand

management decisions that by definition are limited to a single upstream

supplier.1 Unlike category management, brand management decisions

usually are made without express involvement of an upstream supplier

serving as category captain.2

1. One potential exception to this might arise when an upstream supplier

with a significant share of a relevant downstream market uses brand

management practices to inhibit or deter entry and expansion by its fringe

competitors.

2. For a discussion of the evolution from brand management to category

management, see generally Suman Basuroy, Murali K. Mantrala &

14 Category Management Antitrust Handbook

By contrast, category management involves retailers making

decisions (perhaps with recommendations from its category captain)

across multiple competing brands, taking into account the interactions

among them.

When a retailer moves from brand management to category

management, the economic effects bear some resemblance to those that

arise when competing branded products merge. Indeed there is a

conceptual parallel between category management and the more familiar

differentiated products merger analysis.3 Both category management

theory and differentiated products merger analysis predict that an

increase in the price of one branded product will induce some consumers

to switch to alternative products, whether branded or private label.

Profit-maximizing decisions in both contexts will account for the

magnitudes of these effects, which are captured by the relevant own-

price and cross-price elasticities.

B. Competition in Retail Markets

Because category management is a practice used in retailing, any

economic assessment of category management must be grounded in an

economic understanding of retailing. Retail markets are, in the main,

fiercely competitive.4 Entry by new retailers and expansion by existing

retailers occurs constantly and new retail formats (such as the Internet)

have emerged. Consequently, retailer profits tend to be at competitive

levels across many segments, ranging from supermarkets to apparel,

from gasoline stations to drug stores. For instance, according to the

Food and Marketing Institute, grocery store chains’ net profits after taxes

as a percent of sales have fluctuated between 0.93 percent and 1.84

Rockney G. Walters, The Impact of Category Management on Retailer

Prices and Performance: Theory and Evidence, 65 J. MKTG. 16 (2001).

3. See id. (using a differentiated products model to assess the impacts from

category management). For a discussion of the differentiated products

model in the context of merger analysis, see generally Jerry A. Hausman,

Gregory Leonard & J. Douglas Zona, Competitive Analysis with

Differentiated Products, 34 ANNALES D’ECONOMIE ET DE STASTIQUE 159

(1994); Gregory J. Werden & Luke M. Froeb, The Effects of Mergers in

Differentiated Products Industries: Logit Demand and Merger Policy, 10

J.L. ECON.&ORG. 407 (1994).

4. See the discussion below on the thin profit margins earned by firms in the

retail sector, and the frequency of entry and exit. Low profits and ease of

entry and exit are hallmarks of competitive markets.