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Balancing Profitability and Customer Welfare in a Supermarket Chain

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  • Pradeep Chintagunta

    ()

  • Jean-Pierre Dubé

    ()

  • Vishal Singh

    ()

Abstract

We investigate the impact of price discrimination by a large Chicago supermarket chain. First we measure the impact of the chain's current zone-pricing policy on shelf prices, variable profits and consumer welfare across its stores. Using the chain's database to simulate a finer store-specific micro-pricing policy, we study the implications of this policy on profits and welfare. We show how a store-pricing policy that is constrained to offer consumers at least as much surplus as a uniform chain wide pricing policy still enables the retailer to generate substantial incremental profits. To ensure our pricing problem exhibits a well-defined optimum, we use the parsimonious, mixed-logit demand function that allows for flexible substitution patterns across brands and also retains a link to consumer theory. We discuss the issue of price endogeneity when estimating the demand parameters with weekly store-level data. Standard instrumental variables techniques used to account for such endogeneity also seem to increase the magnitudes of own-price elasticities thereby offsetting the problem encountered by previous researchers of predicted prices from a demand model exceeding those in the actual data. Copyright Kluwer Academic Publishers 2003

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Bibliographic Info

Article provided by Springer in its journal Quantitative Marketing and Economics.

Volume (Year): 1 (2003)
Issue (Month): 1 (March)
Pages: 111-147

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Handle: RePEc:kap:qmktec:v:1:y:2003:i:1:p:111-147

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Web page: http://www.springerlink.com/link.asp?id=111240

Related research

Keywords: price discrimination; customer welfare; demand modeling;

References

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  1. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Food Marketing Policy Center Research Reports 037, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  2. Alan L. Montgomery & Eric T. Bradlow, 1999. "Why Analyst Overconfidence About the Functional Form of Demand Models Can Lead to Overpricing," Marketing Science, INFORMS, INFORMS, vol. 18(4), pages 569-583.
  3. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  4. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, Econometric Society, vol. 57(5), pages 1027-57, September.
  5. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
  6. Vrinda Kadiyali & Pradeep Chintagunta & Naufel Vilcassim, 2000. "Manufacturer-Retailer Channel Interactions and Implications for Channel Power: An Empirical Investigation of Pricing in a Local Market," Marketing Science, INFORMS, INFORMS, vol. 19(2), pages 127-148, September.
  7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 841-90, July.
  8. Jaehwan Kim & Greg M. Allenby & Peter E. Rossi, 2002. "Modeling Consumer Demand for Variety," Marketing Science, INFORMS, INFORMS, vol. 21(3), pages 229-250, December.
  9. J. Miguel Villas-Boas & Russell S. Winer, 1999. "Endogeneity in Brand Choice Models," Management Science, INFORMS, INFORMS, vol. 45(10), pages 1324-1338, October.
  10. K. Sudhir, 2001. "Competitive Pricing Behavior in the Auto Market: A Structural Analysis," Marketing Science, INFORMS, INFORMS, vol. 20(1), pages 42-60, January.
  11. Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(5), pages 447-470.
  12. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(1), pages 30-53, February.
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Citations

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Cited by:
  1. Kazuko Kano, 2012. "Menu Costs and Dynamic Duopoly," Global COE Hi-Stat Discussion Paper Series gd12-263, Institute of Economic Research, Hitotsubashi University.
  2. Jiang, Renna & Manchanda, Puneet & Rossi, Peter E., 2009. "Bayesian analysis of random coefficient logit models using aggregate data," Journal of Econometrics, Elsevier, Elsevier, vol. 149(2), pages 136-148, April.
  3. Tenn, Steven & Yun, John M., 2008. "Biases in demand analysis due to variation in retail distribution," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 26(4), pages 984-997, July.
  4. Raphael Thomadsen, 2007. "Product Positioning and Competition: The Role of Location in the Fast Food Industry," Marketing Science, INFORMS, INFORMS, vol. 26(6), pages 792-804, 11-12.
  5. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2014. "Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing," CESifo Working Paper Series 4692, CESifo Group Munich.
  6. Rennhoff, Adam D., 2004. "Paying For Shelf Space: An Investigation Of Merchandising Allowances In The Grocery Industry," Research Reports 25155, University of Connecticut, Food Marketing Policy Center.
  7. Tenn, Steven & Froeb, Luke & Tschantz, Steven, 2010. "Mergers when firms compete by choosing both price and promotion," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 28(6), pages 695-707, November.
  8. Dobson, Paul W. & Waterson, Michael, 2008. "Chain-Store Competition: Customized vs. Uniform Pricing," The Warwick Economics Research Paper Series (TWERPS) 840, University of Warwick, Department of Economics.

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