Curating Complements: Apple & USB-C

One of the strongest arguments for industry standards is that they increase competition. A common charging connector means consumers can choose from hundreds of competing cable manufacturers instead of being locked into a single supplier. The resulting competition lowers prices and increases consumer welfare. When the EU required Apple to transition from its proprietary Lightning connector to USB-C in 2023, it illustrated that this logic, while generally sound, is incomplete. The WSJ reports that one independent repair specialist saw Apple iPhone failures associated with poorly designed or non-compliant USB-C cables and chargers. While these failures appear to be relatively uncommon, they highlight an economic tradeoff that is easy to overlook: greater competition among complementors can also increase quality variation. Under the Lightning ecosystem, Apple exercised tight control over accessory manufacturers through its Made for iPhone (MFi) certification program. Consumers paid more for certified cables, but they also purchased into a curated ecosystem with stronger quality assurance. By requiring Apple to adopt the industry-standard USB-C connector, regulators and policymakers may have increased competition, but they may also have exposed consumers to a much broader range of accessory quality.

Firms sometimes vertically integrate to solve coordination and quality-control problems, and not to exploit market power. Apple had strong incentives to ensure that its phones, chargers, cables, and software functioned reliably as an integrated system because failures reflected directly on the Apple brand, regardless of who manufactured the accessory. A proprietary standard gave Apple greater ability to police quality and exclude unreliable suppliers. This is likely the case for many of the Apple iPhone’s complements. An open standard like USB-C creates incentives for lower prices, interoperability, and reduced electronic waste. It also may have shifted more responsibility to consumers, who must distinguish between high-quality and low-quality accessories in a crowded marketplace. In this case, it is unclear if the pre-purchase consumer search costs and post-purchase repair costs were comparable to the competitive benefits from allowing open entry. But the episode demonstrates that a tradeoff could exist.

Extracting Information from Supply Disruptions

On Sept. 16, 2025, a fire at Novelis's aluminum rolling mill in Oswego, New York disrupted roughly 40 percent of the automotive aluminum sheet used in North America. The importance of this supply disruption can be determined using standard stock market event study analyses. Ford was one of the firms most exposed to the disruption because it relied heavily on automotive aluminum sheet. As analysts began estimating the impact on vehicle production and profitability, Ford's stock price fell sharply. Similarly, investors also penalized Hindalco, Novelis's parent company. The interesting question is what happened to competitors. If one supplier exits temporarily, shouldn't rivals benefit?

Firm	Relationship to Event	Approximate Stock Market Reaction
Ford	Customer of automotive aluminum sheet	-7% abnormal return
Hindalco (owner of Novelis)	Directly affected supplier	-6% abnormal return
Kaiser Aluminum	Potential substitute supplier	+3% to +5% short-term gain
Constellium	Potential substitute supplier	Little measurable effect

Investors appeared to believe that Ford would suffer large costs from the disruption, but they did not assign equally large gains to Novelis's competitors. While aluminum itself is a commodity, automotive aluminum sheet is not. Suppliers must invest in specialized equipment, satisfy demanding quality standards, and undergo lengthy qualification processes with automakers. Even if competitors wanted to absorb Novelis's lost volume, they may not have had sufficient spare capacity or approved production lines to do so quickly. Ford's stock market loss was several times larger than analysts' estimates of immediate production costs because investors recognized that replacing a critical supplier is expensive and time-consuming. There are no doubt benefits to Ford and Novelis from contract exclusivity. This episode highlights the costs.

Vertical Integration and Screening

 

Cutler et al have published a new paper that adds to the catalog of reasons why firms might vertically integrate. They examine Skilled Nursing Facilities (SNFs) owned by hospitals. SNFs make referrals to hospitals for their residents who develop medical issues. But some referrals are more lucrative than others. The SNF has private information about which referrals will earn the hospital more profit. An unaffiliated SNF will capture none of this, but a vertically integrated SNF/hospital can profit by screening in the more lucrative patients and screening out the less lucrative patients.

Addessing Double Markups with the Zollverein

A new paper by Huning and Wolf explore how the Zollverein was formed. A point it makes is that this episode serves as one of history's most dramatic examples of solving the "double markup" trap. Before this 1834 customs union, the German lands were fragmented into hundreds of tiny states, each acting as a local monopoly over its stretch of road or river. As goods moved across borders, every state added its own high transit toll, essentially a successive markup on the wholesale cost. Just as a manufacturer and retailer both adding high margins can kill consumer demand, these "stacked" tolls inflated prices so severely depressed the volume of trade, leaving both the merchants and the states’ treasuries worse off than if they had coordinated.

 

The formation of the Zollverein effectively acted as a massive vertical integration project for the German speaking peoples. Internal customs barriers were abolished and replaced with a single, uniform external tariff with each state getting a share of the revenue based on its population. This eliminated the destructive cycle of successive markups, reduced final prices, and spurred a surge in cross-border trade. When independent entities in a supply chain (or a geography) stop competing for individual margins and start optimizing for the whole, the resulting efficiency gains can build an empire.

 

Profit-Cap Evasion through Vertical Integration

Insurers offering Medicare Part D face a form of profit regulation in which federal reimbursement rates are tied to costs. This provides an incentive to inflate costs. In a new paper, Kakani et al show that firms shifted where they take their profits to an unregulated upstream affiliate. Higher pharmacy prices by affiliated pharmacies represent higher costs to insurers, some of which will be reimbursed through higher insurance prices. Moreover, "We detect larger price increases by insurers that were at greatest risk of exceeding the allowable profit level. More than one-fifth of these higher prices were borne by the federal government." 

Economies of scope between SpaceX and xAI

Link:

The merging of what is arguably Musk’s most successful company, SpaceX, with the more speculative xAI venture is a risk. Founded in 2023, xAI’s main products are the generative AI chatbot Grok and the social media site X, formerly known as Twitter. The company aims to compete with OpenAI and other artificial intelligence firms.

...

With this merger, he plans to use SpaceX’s deep expertise in rapid launch and satellite manufacturing and management to deploy a constellation of up to 1 million orbital data centers. This will provide the backbone of computing power needed to support xAI’s operations.

HT: MarginalRevolution

A functional organization helps Apple innovate

 HBR: 

SUMMARY:

• THE CHALLENGE: Major companies competing in many industries struggle to stay abreast of rapidly changing technologies.  
• ONE MAJOR CAUSE: They are typically organized into business units, each with its own set of functions.  Thus the key decision makers—the unit leaders—lack a deep understanding of all  the domains that answer to them.
• THE APPLE MODEL: The company is organized around functions, and expertise aligns with decision rights. Leaders are cross-functionally collaborative and deeply knowledgeable about details.

As companies grow, they often switch from a functional organization to a divisional one:

Business history and organizational theory make the case that as entrepreneurial firms grow large and complex, they must shift from a functional to a multidivisional structure to align accountability and control and prevent the congestion that occurs when countless decisions flow up the org chart to the very top.

But, you end up with general managers who lack technical expertise making decisions.  Instead:

...Apple relies on a structure that centers on functional expertise. Its fundamental belief is that those with the most expertise and experience in a domain should have decision rights for that domain. This is based on two views: First, Apple competes in markets where the rates of technological change and disruption are high, so it must rely on the judgment and intuition of people with deep knowledge of the technologies responsible for disruption. Long before it can get market feedback and solid market forecasts, the company must make bets about which technologies and designs are likely to succeed in smartphones, computers, and so on. Relying on technical experts rather than general managers increases the odds that those bets will pay off. 

Example:  Apple puts cameras in iPhones, computers, laptops, and iPads.  

...Apple’s more than 600 experts on camera hardware technology work in a group led by Graham Townsend, a camera expert. Because iPhones, iPads, laptops, and desktop computers all include cameras, these experts would be scattered across product lines if Apple were organized in business units. That would dilute their collective expertise, reducing their power to solve problems and generate and refine innovations.

What happens when functional areas disagree?

The answer is collaborative debate. Because no function is responsible for a product or a service on its own, cross-functional collaboration is crucial. When debates reach an impasse, as some inevitably do, higher-level managers weigh in as tiebreakers, including at times the CEO and the senior VPs. To do this at speed with sufficient attention to detail is challenging for even the best of leaders, making it all the more important that the company fill many senior positions from within the ranks of its VPs, who have experience in Apple’s way of operating. 

BOTTOM LINE:

APPLE’S FUNCTIONAL ORGANIZATION is rare, if not unique, among very large companies. It flies in the face of prevailing management theory that companies should be reorganized into divisions and business units as they become large. But something vital gets lost in a shift to business units: the alignment of decision rights with expertise. 

Why do companies so often cling to having general managers in charge of business units? One reason, we believe, is that making the change is difficult. It entails overcoming inertia, reallocating power among managers, changing an individual-oriented incentive system, and learning new ways of collaborating. That is daunting when a company already faces huge external challenges. An intermediate step may be to cultivate the experts-leading-experts model even within a business unit structure. For example, when filling the next senior management role, pick someone with deep expertise in that area as opposed to someone who might make the best general manager. But a full-fledged transformation requires that leaders also transition to a functional organization. Apple’s track record proves that the rewards may justify the risks. Its approach can produce extraordinary results.  

Franchise Recontracting and Hold up

With 76 stores and 1600 employees over four states, Paradigm Investment Group is a large franchisee of Hardee's restaurants. It is currently suing Hardee's to block them from terminating franchise agreements due to Paradigm's failure to comply with new contract terms. At issue are a nonpayment of monthly technology fee, limited hours of operation, non-use of third-party delivery services, but primarily Paradigm's non-participation in an in-app loyalty program.

The market conditions when the terms of a franchises contract are agreed upon will almost certainly change over time so that it will be efficient to alter the terms. When Paradigm first became a franchisee 25 year ago, smartphone apps to order food and Door Dash did not exist. An efficient contract would now address these new aspects of an evolving market. However, over the decades, Paradigm has made large investments in the Hardee's brand and business practices. Hardee's could seek to impose conditions on the implementation of these practices that are disadvantageous to the franchisee. If Paradigm does not agree, it could have to abandon these investments. That is, the franchisor can use these relationship-specific sunk costs to holdup the franchisee.

What do Ferrari and Hermes have in common?

 WSJ:

With a list price of $3.7 million, Ferrari’s new “hypercar” was revealed to the public in October with a twist: It wasn’t available for sale....

Money isn’t enough to buy a top-of-the-range Ferrari. You need to be in a long-term relationship with the company.

By leveraging the rabid fandom of its customers through a business model based on uber-scarcity, the storied Italian company is enjoying a new golden age. Following an almost tenfold increase in the stock since its initial public offering almost a decade ago, Ferrari is now worth $90 billion, making it the most valuable car company in Europe—despite delivering just 13,752 vehicles last year.

 John Yun on Hermes:

Aggrieved ... plaintiffs in California have filed a class-action suit against Hermès alleging that [customers are] “coerced” to spend $1,300 on a shawl or $820 on a belt before being “allowed” to hand over an additional $12,000 or more for a Birkin bag...

In antitrust language, the specific allegation is that Hermès is engaged in an illegal tying scheme—where the French company is leveraging its market power in handbags (i.e., the “tying product”) into ancillary goods, such as scarves, belts, jewelry, and shoes (i.e., the “tied products”).

How long before someone sues Ferrari for "tying" sales of new cars to past purchases?

Standardization and Specialization

I am a couple dozen episodes in on Dave Broker's Industrial Revolutions Podcast and cam across this tidbit from chapter 14.

But what Whitworth was most famous for was something called British Standard Whitworth – BSW.

Up until this point, different machine tool makers used different designs for their tools. For the end users – really, anyone involved in industry by this point – it was maddening. If you had a steam engine made by Company X, for example, and one of the screws was damaged, it could only be replaced with a screw provided by Company X or the vendor for Company X. Otherwise the screw wouldn’t fit.

Along with Clement, Roberts, and other Maudslay alumni, Whitworth was a strong proponent for standardization such parts – nuts, bolts, and screws. So, in 1841, he sat down and wrote up what he thought should be the standards. Screw threads should be set at a 55 degree angle with very specific depths and radii. By the 1870s, as the railroads became increasingly frustrated with the different systems being used, they said, “yeah, Whitworth was right.” By the 1890s, everyone was using BSW.

With BSW standardization, a steam engine maker need not produce all of the screws, rivets, fasteners, and other minor parts. Outsourcing these components allowed him to focus on improving the steam engine and the component makers to improve production. Economies of scale in, say, screw manufacturing unleashed by dis-integration would drive costs down dramatically.

I recommend the podcast to fellow history buffs and I am sure I will mine it for future blog posts.

Colocating Complements

 

Providers of complementary services can increase demand by reducing the search costs of shared customers. Perhaps colocation will suffice but the next step would be vertical integration.

Why vertical merger challenges are hard to win

In 2016, the Antitrust Division of the US Dept of Justice (DOJ) challenged the vertical merger of Time Warner (movies) and ATT which owned DirectTV, a cable provider.  It was the first litigated vertical merger case in 40 years.

The DOJ used a "foreclosure" theory, arguing that the vertically integrated firm (movies + distribution) would give ATT the incentive and ability, via increased bargaining leverage, to raise the price of Time Warner movies to rival distributors, like Comcast. As a result, Comcast would raise its subscription price and some Comcast customer would shift from Comcast to ATT's DirectTV. 

The government argued that these anticompetitive costs outweighed the well-documented procompetitive benefits of vertical integration (Cooper et al., 2005), namely the better incentive alignment of Time Warner and ATT, e.g., that post-merger markups on TimeWarner movies shown by ATT, would fall. 

The Antitrust Division lost its case in court because they couldn't prove all the assertions of the theory, that: (i) ATT would raise the price of Time Warner content to rival distributors, (ii) Comcast would raise its subscription price, (iii) that Comcast customers would switch to ATT, and (iv) these anticompetitive costs outweighed the merger's procompetive benefits. 

After DOJ lost the case, the merger was consummated.  But ATT just sold its remaining stake in DirecTV, undoing the merger the DOJ fought so hard to challenge. 

The expert witness for the parties, Dennis Carlton et. al. (2022), weighed in on the failure of the merger:

That the previous integration did not work out as AT&T hoped represents a firm's decision regarding what risks to take in the market, not an indication that the government's alleged harms came to pass. Indeed, the disintegration is evidence that the alleged harms, such as supracompetitive pricing or other exercises of market power, did not occur. The reasoning is straightforward: if the mergers had created significant market power as the government alleged, AT&T would have been incentivized to retain ownership, which would make the subsequent spinoffs less likely (see, for example, Hazlett 2021).

ChatGPT on why Vertical merger cases are hard to win:

• Pro-competitive Justifications: Companies often argue that vertical mergers can create efficiencies, such as reducing costs, improving supply chain coordination, and enhancing product quality. These claims can be compelling in court, making it harder for the government to prove that the merger would harm competition. 
• Better incentive alignment between ATT and TimeWarner, e.g., on price, called "the elimination of double marginalization."
•  Lack of Established Precedent: There is less legal precedent and fewer clear guidelines regarding vertical mergers compared to horizontal mergers (where firms in the same market merge). Courts and regulators may have less confidence in assessing potential competitive harms in vertical mergers. 
• Market Definition Difficulties: Defining the relevant markets can be complex in vertical mergers. Regulators must consider not only the direct competitors in the market but also how the merger affects suppliers and distributors, which often involves nuanced economic analysis. 
• Is the market defined at the upstream content level or the downstream distribution level or at both?
• Indirect Effects: The potential anti-competitive effects of vertical mergers are often indirect, making it harder to demonstrate harm. For instance, a merger may not lead directly to higher prices but might reduce competition over time or create barriers for new entrants, which can be more difficult to quantify.
• Dynamic Nature of Markets: Many industries are dynamic, and the competitive landscape can change rapidly. Regulators and courts must consider not only the current state of competition but also future market developments, which adds uncertainty. 
• The advent of streaming. 
• Economic Theories: There are differing economic theories about how vertical mergers can affect competition.  Some economists argue that these mergers are typically beneficial, while others highlight potential risks. This divergence in expert opinion can complicate litigation. These factors contribute to the difficulty in successfully challenging vertical mergers in legal and regulatory contexts.
•  For example, see Boshoff et al (2021), who show that how and over what parties bargain, namely one- or two-part prices, determine whether a merger will raise price. 

REFERENCES

• Boshoff, Willem H. and Froeb, Luke M. and Minnie, Roan and Tschantz, Steven T., Bargaining Competition and Vertical Mergers (March 31, 2021). SSRN
• Dennis W. Carlton , Georgi V. Giozov, Mark A. Israel and Allan L. Shampine, 'A Retrospective Analysis of the AT&T/Time Warner Merger' (2022) 65 JLE S461
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. SSRN 
• i) Comment by John Comanor, Frederick Scherer, and Robert Steiner 
• ii) Reply by John Comanor, Frederick Scherer, and Robert Steiner 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, A Comparative Study of United States and European Union Approaches to Vertical Policy, George Mason Law Review, 13:2 (Winter, 2005) 289-308. SSRN 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Restraints and Antitrust Policy: What about the Evidence? Competition Policy International, 1:2 (Autumn, 2005) 45-64. SSRN 
• i) Comment by Frederick Scherer (2005) 
• ii) Comment by Ralph Winter (2005) 
• iii) Reply by authors (2006) 
• iv) Rejoinder by Ralph Winter (2006)
• Thomas Hazlett, “Antitrust Activists Want to Go Full Throttle. Here's a Lesson. They Should Consider First.” Barron's, July 29, 2021,.

 

How should Apple and Mozilla be paid by Google?

WSJ on the antitrust ruling against Google.:

“Google has not achieved market dominance by happenstance. It has hired thousands of highly skilled engineers, innovated consistently, and made shrewd business decisions,” Judge Mehta writes. “The result is the industry’s highest quality search engine, which has earned Google the trust of hundreds of millions of daily users.”

So what’s the antitrust problem? The judge says Google’s advertising revenue-sharing payments to Apple, Mozilla and others for default placement have made it harder for potential startups and Microsoft to compete.

Greg Werden on the economics behind the payments:

Apple and Mozilla, which developed Safari and Firefox, did not develop search engines. Instead, they rented out default status in their browsers for a share of the advertising revenue consequently earned by the tenant search engine.

Google pays Apple 36 percent of its gross revenue from Safari search queries ... approximately $20 billion in 2022. Google paid Mozilla ... more than $150 million in 2020, ...approximately 80 percent of Mozilla’s revenue. 

BOTTOM LINE: Apple and Mozilla developed and own valuable "property" (browsers). Google rents space on their property to display ads. Now that the court has outlawed Google's payments for default placement, Apple and Google and Mozilla and Google will have to find another way to transact.

Is Hermes leveraging its "monopoly" over handbags to monopolize shawls and belts?

From John Yun:

Aggrieved ... plaintiffs in California have filed a class-action suit against Hermès alleging that [customers are] “coerced” to spend $1,300 on a shawl or $820 on a belt before being “allowed” to hand over an additional $12,000 or more for a Birkin bag...

In antitrust language, the specific allegation is that Hermès is engaged in an illegal tying scheme—where the French company is leveraging its market power in handbags (i.e., the “tying product”) into ancillary goods, such as scarves, belts, jewelry, and shoes (i.e., the “tied products”).

Thus, the Birkin and Kelly bags represent what is called a “single-brand monopoly.” In support of this claim, the complaint identifies Air Jordans and the Love bracelet as other examples of iconic products that, apparently, also have no substitutes.

Of course, this theory makes no economic sense.

if Hermès really wanted to implement a plot to extract more money from its consumers—which is the end goal of a tying scheme—they could do so without tying. Both the Birkin and Kelly bags have a fixed supply because they are handmade. Given the overwhelming excess demand for these bags, it seems fairly clear that Hermès could charge significantly more for them.

Vertical Integration in Movie Distribution

A new paper, "Vertical Integration and Market Foreclosure in Media Markets: Evidence from the Chinese Motion Picture Industry," by Gil et al. casts even further doubt on vertical foreclosure strategies. The claim is that a retailer integrated with a producer could increase profits by disadvantaging independent producers. Alternatively, vertical integration could alleviate double marginalization issues so that profits increase by offering lower prices to more consumers. In the US, the Paramount decision required movie studios to divest their movie theaters based on the possible competitive harm from vertical foreclosure. But China still has both integrated and independent theaters.

... there is no evidence consistent with anticompetitive input and customer foreclosure in integrated theaters. On the one hand, integrated and independent theaters screen the same share of integrated and independent movies. On the other hand, revenue differences between continued theater-owned movies and discontinued independent movies are inconsistent with customer-market-foreclosure motives given existing differences in distribution incentives between integrated and nonintegrated structures.

The authors go on to estimate that integrated theaters deliver a higher level of utility with integrated movies due to moving down the demand curve with lower prices.

This finding is important to current events in antitrust policy for two reasons. Part of the FTC's current Amazon case, as with its other enforcement vertical actions, alleges foreclose of independent merchants. Movie distribution was the poster child for this theory. More broadly, it underscores the power of a consumer surplus standard. Why interpret the law so severely that it harms consumers?

Spotify's Complements?

 

Anne Steele at the WSJ reports that Spotify is the leading audio-streaming platform with 600 million users and a 30% market share. Even so, it seems to be struggling. After a couple of rounds of layoffs, some false starts from expansion into podcasting, concert promotion, and audio books, it earned its first quarterly profits since 2022 in the last quarter of 2023. Competition with tech giants Apple, Amazon, and Google have kept margins low - for every dollar it earns on music streaming, it pays $0.70 in royalties.

But its tech giant competitors do not have to earn profits on streaming music. Their other services can be complementary to audio-streaming. For example, Apple would be happy if Apple Music operated at a loss so long as it helped to sell more high-margin iPhones. This is exactly what Netscape complained about in the late 1990s when Microsoft gave the Internet Explorer away for free. Netscape's revenue model was based on the sales of the browser. Microsoft's was based on sales of operating systems. So long as a free browser sold more computers with Windows already preinstalled, Microsoft was happy. How could Netscape compete with free? How can Spotify compete with subsidized competitors?

Steele hints at this problem by suggesting that Spotify could be a takeover target for companies like Microsoft, Netflix, or Tencent. These companies all have services that could be complements for music streaming. They might be willing to subsidize Spotify if doing so sells more operating systems, movies, or video games.

FTC vs. Amazon: If there is no solution (remedy), there is no problem (liability)

The FTC asked a Washington court to split its monopolization case against Amazon (earlier blog post) in two: 1. to determine whether Amazon has a monopoly (liability), and then 2. what to do about it (remedy). 

Their argument (not yet posted) likely would be that bifurcation is more efficient because if FTC loses on liability, there would be no need for a remedy trial.  But if the FTC has to litigate both at once, it would change the trial.  The FTC would have to answer the questions "what should they have done differently?"  and "why is the choice they made bad for competition?"  The burden of answering it would fall on the FTC, and its economic expert. 

For example, suppose that the FTC thinks that the source of Amazon's market power is the integration of its fulfillment network with its electronic marketplace, and proposes a remedy to force divestiture of the two.  An economic witness would be forced to admit that divested companies may not perform as well as the integrated one (See Chapters 22, 23), e.g., by creating a double markup problem, or by foregoing some other economy of integration. 

The Dept of Justice brought (I was Chief Economist then), and then lost, the ATT/TimeWarner vertical merger challenge, in part because it could not overcome this burden of proof.

SOME RELATED ACADEMIC WORK:

• Willem H. Boshoff, Luke M. Froeb, Wihan Marais, Roan J. Minnie, Steven Tschantz. Bargaining Competition and Vertical Mergers: The Problem of Model Selection, Review of Industrial Organization (SSRN). 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as a Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. (SSRN)
• Comment by Frederick Scherer (2005) 
• Comment by Ralph Winter (2005) 
• Reply by authors (2006) 
• Rejoinder by Ralph Winter (2006)

TRUTH IN BLOGGING: I have done consulting work for Amazon.

Post will be updated as information becomes available.  

The Market for Private-Label Products

There is a nice podcast on "Store-Brand Products" over at the "Economics of Everyday Things." It touches on many managerial economic concepts. There are multiple factors going into the store brands on the shelves.

1. Brand names may have excess capacity.

...some store brand products are actually made by the same companies that produce the name brand versions of those products. Take, for instance, Costco. Some of the Kirkland brand of coffee blends are made by Starbucks. Kirkland batteries? Duracell. And Kirkland diapers? Those come from Kimberly-Clark, the company that makes Huggies.

2. Brand names may be too expensive.

Bringing a store brand product to market usually starts like this: a national retailer like Albertsons has category managers who are in charge of specific kinds of goods. They might see that a certain name-brand tomato sauce is selling in big numbers, but it’s a little expensive — which means there’s an opportunity for a more affordably priced store-brand version.

3.  Private label manufacturers often explicitly reverse engineer the existing product.

Retailers ask Winland Foods to reverse engineer name-brand products and create a new version.

BERINGAUSE: We have a large R&D facility in Chicago with a large group of food scientists. And we may have customers bring us something that they want us to develop. They may say we’d like an emulation or something better than a certain pasta sauce that is out there.

4. Private label manufacturers have little bargaining power

Marketing professor Kusum Ailawadi says that private label manufacturers don’t have much bargaining power when it comes to negotiating with retailers.

AILAWADI: Because nobody knows who the supplier is — the consumer doesn’t. So the supplier doesn’t have much leverage. 

Gas Stations -> Convenience Stores -> Restaurants?

Gas stations have always offered complementary services. In the 40s and 50s it was mechanic services, in the 60s, and 70s, it was wiper and oil changes, and in the 80s and 90s it was convenience store items. Pay-at-the-pump may have given drivers less of a reason make in-store purchases. Ease of substitution across gas stations makes the search for higher margin complements a profitable strategy.

However, the current trend is for more gars stations/convenience stores to offer fresh food. This may be the result of declining demand in convenience store mainstays - cigarette smoking is steadily declining and more fuel efficient cars go longer between fill ups.Perhaps the transition from selling packaged Slim Jims and Corn Nuts to preparing fresher foods is to get a leg up on the transition to EVs.

But a shift to electric vehicles should go well with the food business if it means consumers spend longer stretches of time charging their vehicles. 

The Hansa as a Brand

The History of the Germans podcast I have been enjoying has just gotten to the Hanseatic League, the trading network dominated by the Germans that came to dominate the Baltic and North Seas in the high middle ages. One the first trade routes was to the then important trade center of Novgorod. A curious question was why this network was so successful. There appear to be a number of factors but one important one has to do with developing a brand to signal quality that ameliorated asymmetric information problems.

And we get another crucial element, the commercial discipline and branding. If you came to Novgorod on your own, assuming you made it at all, it would have been very difficult for you to sell your wares at a good price. Your clients will ask: Is that cloth you sell really the high-quality material from Bruges and not the cheap stuff from Ypres? That salt, could it be mixed with something? Where do I go when I have a complaint and you have gone home?

The brand was supported by an effective governance structure for the traders visiting St. Peter’s Yard in Novgorod.

The members of the St. Peter’s Yard maintained or at least pretended to maintain strict discipline amongst their ranks and if one of their customers had found themselves cheated by one of these merchants, they knew where to go for redress. This created what we would today call a brand. Merchants who came with that fleet became seen as trustworthy. They may be a touch more expensive, but you get what you were hoping to get.