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Price and Product-Line Rivalry Among Supermarket Retailers

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  • Richards, Timothy J.

Abstract

Product-line length, or variety, is a key competitive tool used by retailers to differentiate themselves from rivals. Theoretical models of price and variety competition suggest that both store and product heterogeneity are key determinants of price and variety strategies, but none test this hypothesis in a rigorous way. This study provides the first empirical evidence on supermarket retailers' combined price and variety strategies using a nested CES modeling framework. Unlike other discrete-choice models of product differentiation, the NCES model is sufficiently general to admit both corner and interior solutions in both store and product choice. The model is estimated using store-level scanner data for all grocery chains in a major West Coast market and finds that retailers do indeed use both price and product-line strategies to compete for market share, but tend to follow moderately cooperative pricing strategies and price and more cooperative strategies in variety.

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Bibliographic Info

Paper provided by Arizona State University, Morrison School of Agribusiness and Resource Management in its series Working Papers with number 28535.

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Date of creation: 2004
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Handle: RePEc:ags:asumwp:28535

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Web page: http://www.east.asu.edu/msabr
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Related research

Keywords: game theory; nested CES; price competition; retailing; variety.; Demand and Price Analysis;

References

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  9. Cotterill, Ronald W. & Dhar, Tirtha Pratim, 2003. "Oligopoly Pricing with Differentiated Products: The Boston Fluid Milk Market Channel," Research Reports 25189, University of Connecticut, Food Marketing Policy Center.
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  14. de Palma, Andre & Lindsey, Robin & von Hohenbalken, Balder & West, Douglas S., 1994. "Spatial price and variety competition in an urban retail market : A nested logit analysis," International Journal of Industrial Organization, Elsevier, vol. 12(3), pages 331-357, September.
  15. Naufel J. Vilcassim & Vrinda Kadiyali & Pradeep K. Chintagunta, 1999. "Investigating Dynamic Multifirm Market Interactions in Price and Advertising," Management Science, INFORMS, vol. 45(4), pages 499-518, April.
  16. Aviv Nevo, 2000. "A Practitioner's Guide to Estimation of Random-Coefficients Logit Models of Demand," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 513-548, December.
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