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Implicit Contracts and Price Stickiness: Evidence from Customer-Level Scanner Data

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  • B. VERHELST

    ()

  • D. VAN DEN POEL

Abstract

This paper uses scanner data at the individual customer level, compiled from the loyalty card database of a European retailer, to determine the importance of implicit contracts as a source of price stickiness. Drawing from Customer Relationship Management (CRM), we use segmentation techniques and cluster analysis to split up the customer base in three groups according to their behavioural loyalty to the retailer. We then perform a demand analysis on the loyal and nonloyal segments in parallel, discarding the large middle cluster. Our results from estimating a Behavioural Almost Ideal Demand System (B-AIDS) for numerous product categories reveal that loyal customers have a considerably more concave demand curve than non-loyals. This result holds true in the aggregate, and for all but some individual product categories. The more pronounced asymmetry in the price elasticity of demand for loyal customers is a major incentive for the retailer to commit to a sticky price.

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File URL: http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_12_776.pdf
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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 12/776.

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Length: 26 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:rug:rugwps:12/776

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Related research

Keywords: Customer loyalty; Clustering; Curvature of demand;

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References

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  1. S. Fabiani & M. Druant & I. Hernando & C. Kwapil & B. Landau & C. Loupias & F. Martins & T. Mathä & R. Sabbatini & H. Stahl & A. Stokman, 2005. "The pricing behaviour of firms in the euro area : new survey evidence," Working Paper Research 76, National Bank of Belgium.
  2. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
  3. Emmanuel Dhyne & Luis J. Álvarez & Hervé le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lünnemann & Fabio Rumler & Jouko Vilmunen, 2005. "Price setting in the euro area: Some stylized facts from Individual Consumer Price Data," Banco de Espa�a Working Papers 0528, Banco de Espa�a.
  4. Blinder, Alan S, 1991. "Why Are Prices Sticky? Preliminary Results from an Interview Study," American Economic Review, American Economic Association, vol. 81(2), pages 89-96, May.
  5. Maarten Dossche & Freddy Heylen & Dirk Van den Poel, 2010. "The Kinked Demand Curve and Price Rigidity: Evidence from Scanner Data," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 723-752, December.
  6. George Baltas, 2002. "An applied analysis of brand demand structure," Applied Economics, Taylor & Francis Journals, vol. 34(9), pages 1171-1175.
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  8. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
  9. B. Verhelst & D. Van Den Poel, 2010. "Price rigidity in Europe and the US: A comparative analysis using scanner data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/684, Ghent University, Faculty of Economics and Business Administration.
  10. Hall, Simon & Walsh, Mark & Yates, Anthony, 2000. "Are UK Companies' Prices Sticky?," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 425-46, July.
  11. Jan Roelf Bult & Tom Wansbeek, 1995. "Optimal Selection for Direct Mail," Marketing Science, INFORMS, vol. 14(4), pages 378-394.
  12. Alston, Julian M & Foster, Kenneth A & Green, Richard D, 1994. "Estimating Elasticities with the Linear Approximate Almost Ideal Demand System: Some Monte Carlo Results," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 351-56, May.
  13. Lakshman Krishnamurthi & S. P. Raj, 1991. "An Empirical Analysis of the Relationship Between Brand Loyalty and Consumer Price Elasticity," Marketing Science, INFORMS, vol. 10(2), pages 172-183.
  14. Douglas Fisher & Adrian R. Fleissig & Apostolos Serletis, 2001. "An empirical comparison of flexible demand system functional forms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(1), pages 59-80.
  15. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
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Cited by:
  1. B. Verhelst & D. Van Den Poel, 2012. "Deep Habits in Consumption: A Spatial Panel Analysis Using Scanner Data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/823, Ghent University, Faculty of Economics and Business Administration.

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