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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.

Suggested Citation

  • B. Verhelst & D. Van Den Poel, 2012. "Implicit Contracts and Price Stickiness: Evidence from Customer-Level Scanner Data," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/776, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:12/776
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    File URL: http://wps-feb.ugent.be/Papers/wp_12_776.pdf
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    References listed on IDEAS

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    Cited by:

    1. Daniel Levy & Andrew T. Young, 2021. "Promise, trust, and betrayal: Costs of breaching an implicit contract," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 1031-1051, January.
    2. Benjamin Verhelst & Dirk Van den Poel, 2014. "Deep habits in consumption: a spatial panel analysis using scanner data," Empirical Economics, Springer, vol. 47(3), pages 959-976, November.
    3. Beck, Günter W. & Lein, Sarah M., 2015. "Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality," Working papers 2015/13, Faculty of Business and Economics - University of Basel.
    4. Beck, Günter W. & Lein, Sarah M., 2020. "Price elasticities and demand-side real rigidities in micro data and in macro models," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 200-212.

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    More about this item

    Keywords

    Customer loyalty; Clustering; Curvature of demand;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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