This number is only expected to increase as the quality of
private label products converges with the quality of brand products and as consumers’
acceptance of these products increases. Private label goods not only pose a problem for
the industry because they are direct substitutes, but also because they deter companies
within the industry from raising prices. Consumers evaluate the trade off between
quality and price for both brand name products and private label products. Since these
goods are elastic, any increases in the price differential adversely affects volume. These
substitutes create a huge strain on Kraft’s profits because they prevent the company
from passing on higher input prices to consumers. For international operations, this
effect is amplified since private label products are more widely accepted than in the
U.S. and because the price differential abroad is already larger than it is domestically.