Chain-Store Competition: Customized vs. Uniform Pricing
AbstractRetail chains essentially practice one of two broad strategies in setting prices across their stores. The more straightforward is to set a chain- or country- wide price. Alternatively, managers of retail chains may customize prices to the store level according to local demand and competitive conditions. For example, a chain may price lower in a location with lower demand and/or more competition. However, despite having the ability to customize prices to local market conditions, some choose instead to commit to uniform pricing with a “one price policy” across their entire store network. As an illustration, we focus on UK supermarket chains. Is there an advantage to be gained from deliberately choosing not to price discriminate across locations? We show generally and illustrate through means of a specific model that there exists a strategic incentive to soften competition in competitive markets by committing not to customize prices at the store level and instead adopt uniform pricing across the store network, and to raise overall profits thereby. Furthermore, we characterize quite precisely the circumstances under which uniform pricing is, and is not, profitable and illustrate that under a range of circumstances uniform pricing may be the preferable strategy.
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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 840.
Length: 29 pages
Date of creation: 2008
Date of revision:
Chain-store retailers ; price discrimination ; uniform pricing ; local pricing ; commitment;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-01 (All new papers)
- NEP-COM-2008-03-01 (Industrial Competition)
- NEP-IND-2008-03-01 (Industrial Organization)
- NEP-MIC-2008-03-01 (Microeconomics)
- NEP-MKT-2008-03-01 (Marketing)
- NEP-URE-2008-03-01 (Urban & Real Estate Economics)
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