The Natural Monopoly Effect in Brand Purchasing: Do Big Brands Really Appeal to Lighter Category Buyers?

Abstract

This paper investigates the Natural Monopoly [NM] effect, which is that large brands have buyers who are on average less frequent or ‘lighter’ purchasers of the product category. The study analyzes the NM effect for brands in 28 consumer goods categories in The Netherlands. The analysis employs a multiple regression with category purchase rate as the dependent variable; and brand penetration, together with brand price, brand type, average pack size and promotion incidence as independent variables. The study finds that higher brand penetration is indeed associated with a lower rate of category purchase, controlling for the other variables in the model. The NM effect is reasonably large: the largest two brands in a category tend to have a buyer base that on average purchase the category about 25% less frequently than those of the smallest two. The study also derives an explanation for how large brands are generally purchased more frequently, even when their buyer base on average buys the category less frequently. The findings imply that a focus on heavy category buyers is inconsistent with the goal of growing a brand.