Repositioning Dynamics and Pricing Strategy
AbstractWe measure the revenue and cost implications to supermarkets of changing their price positioning strategy in oligopolistic downstream retail markets. Our estimates have implications for long-run market structure in the supermarket industry, and for measuring the sources of price rigidity in the economy. We exploit a unique dataset containing the price-format decisions of all supermarkets in the U.S. The data contain the format-change decisions of supermarkets in response to a large shock to their local market positions: the entry of Wal-Mart. We exploit the responses of retailers to WalMart entry to infer the cost of changing pricing-formats using a .revealed-preference. argument similar to the spirit of Bresnahan and Reiss (1991). The interaction between retailers and Wal-Mart in each market is modeled as a dynamic game. We find evidence that suggests the entry patterns of WalMart had a significant impact on the costs and incidence of switching pricing strategy. Our results add to the marketing literature on the organization of retail markets, and to a new literature that discusses implications of marketing pricing decisions for macroeconomic studies of price rigidity. More generally, our approach which incorporates long-run dynamic consequences, strategic interaction, and sunk investment costs, outlines how the paradigm of dynamic games may be used to model empirically firms' positioning decisions in Marketing.
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Bibliographic InfoPaper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2075.
Date of creation: Jan 2011
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-COM-2011-04-02 (Industrial Competition)
- NEP-HME-2011-04-02 (Heterodox Microeconomics)
- NEP-IND-2011-04-02 (Industrial Organization)
- NEP-MKT-2011-04-02 (Marketing)
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- Sanjog Misra, 2013. "Markov chain Monte Carlo for incomplete information discrete games," Quantitative Marketing and Economics, Springer, vol. 11(1), pages 117-153, March.
- Victor Aguirregabiria & Junichi Suzuki, 2013. "Identification and Counterfactuals in Dynamic Models of Market Entry and Exit," Working Papers tecipa-475, University of Toronto, Department of Economics.
- Paul Ellickson & Sanjog Misra, 2012. "Enriching interactions: Incorporating outcome data into static discrete games," Quantitative Marketing and Economics, Springer, vol. 10(1), pages 1-26, March.
- Sanjog Misra & Harikesh Nair, 2011. "A structural model of salesforce compensation dynamics: Response to Profs. Rust and Staelin," Quantitative Marketing and Economics, Springer, vol. 9(3), pages 267-273, September.
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