IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Shopping Behavior and Consumer Preference for Store Price Format: Why “Large Basket” Shoppers Prefer EDLP

Listed author(s):
  • David R. Bell

    (Anderson School of Management, University of California-Los Angeles, 110 Westwood Plaza, Los Angeles, California 90095)

  • James M. Lattin

    (Graduate School of Business, Stanford University, Stanford, California 93405)

Registered author(s):

    In recent years, the supermarket industry has become increasingly competitive. One outcome has been the proliferation of a variety of pricing formats, and considerable debate among academics and practitioners about how these formats affect consumers' store choice behavior. This paper advances the idea that consumer shopping behavior (as defined by average size of the shopping basket and the frequency of store visits) is an important determinant of the store choice decision when stores offer different price formats. A recent article that summarized the result of Bruno's management switching the chain from EDLP to HILO illustrates the importance of this issue: “The company's price-conscious customers, used to shopping for a fixed basket of goods, stayed away in droves.” Thus, the audience for this paper includes practitioners and academics who wish to understand store choices or predict how a change in price format might affect store profitability and the mix of clientele that shop there. This paper attempts to understand the relationship between grocery shopping behavior, retail price format, and store choice by posing and answering the following questions. First, after controlling for other factors (e.g., distance to the store, prior experience in the store, advertised specials), do consumer expectations about prices for a basket of grocery products (“expected basket attractiveness”) influence the store choice decision? This is a fairly straightforward test of the effect of price expectations on store choice. Second, are different pricing formats (EDLP or HILO) more or less attractive to different types of shoppers? To adequately answer the second question, we must link consumers' category purchase decisions, which collectively define the market basket, and the store choice decision. We study the research questions using two complementary approaches. First, we develop a stylized theory of consumer shopping behavior under price uncertainty. The principal features and results from the stylized model can be summarized as follows. Shoppers are defined (in a relative sense) as either large or small basket shoppers. Thus, we abstract from the vicissitudes of individual shopping trips and focus on meaningful differences across shoppers in terms of the expected basket size per trip. The shoppers make category purchase incidence decisions and can choose to shop in either an EDLP or a HILO store. Large basket shoppers are shoppers who have a relatively high probability of purchase for any given category, and as such they are more captive to prices across many different categories. The first two propositions summarize the price responsiveness of shoppers. In particular, the large basket shoppers are responsive to price in their individual category purchase incidence decisions; this makes them responsive to the expected basket price in their store choice decisions. This key structural implication of the model highlights an asymmetry between response at the category level and response at the store level. The result is quite intuitive; a (large basket) shopper with less ability to respond to prices in individual product categories will be more sensitive to the expected cost of the overall portfolio (the market basket) when choosing a store. The final proposition derives the price at which a given shopper will be indifferent between an EDLP and a HILO store. The key insight is that as a shopper increases his or her tendency to become a large basket shopper, the EDLP store can increase its (constant) price closer and closer to the price in the HILO store. Conversely, as the shopper becomes more of small basket shopper, the EDLP store must lower its price closer to the deal price in the HILO store. Thus, we have the interesting result that small basket shoppers prefer HILO stores, . The empirical testing mirrors the development of the consumer theory. We test the implications of the propositions using a market basket scanner panel database. The database includes two years of shopping data for 1,042 households in two separate market areas. We first use household-level grocery expenditures to model the probability that a household is a large or small basket shopper. Subsequently, we estimate purchase incidence and store choice models. We find that after controlling for important factors such as household distance to the store, previous experience in the store, and advertised specials, price expectations for the basket influence store choice. Furthermore, EDLP stores get a greater than expected share of business from large basket shoppers; HILO stores get a greater than expected share from small basket shoppers. Consistent with the implications of the propositions, large basket shoppers are relatively price inelastic in their category purchase incidence decisions and price elastic in their store choice decisions.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://dx.doi.org/10.1287/mksc.17.1.66
    Download Restriction: no

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 17 (1998)
    Issue (Month): 1 ()
    Pages: 66-88

    as
    in new window

    Handle: RePEc:inm:ormksc:v:17:y:1998:i:1:p:66-88
    Contact details of provider: Postal:
    7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page: http://www.informs.org/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Gilles Laurent & Scott Neslin & Greg Allenby & Andrew Ehrenberg & Steve Hoch & Robert Leone & John Little & Leonard Lodish & Robert Shoemaker & Dick Wittink, 1994. "A Research Agenda for Making Scanner Data More Useful to Managers," Post-Print hal-00819509, HAL.
    2. Randolph E. Bucklin & James M. Lattin, 1991. "A Two-State Model of Purchase Incidence and Brand Choice," Marketing Science, INFORMS, vol. 10(1), pages 24-39.
    3. 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.
    4. Mulhern, Francis J. & Leone, Robert P., 1990. "Retail promotional advertising : Do the number of deal items and size of deal discounts affect store performance?," Journal of Business Research, Elsevier, vol. 21(3), pages 179-194, November.
    5. Rajiv Lal & Ram Rao, 1997. "Supermarket Competition: The Case of Every Day Low Pricing," Marketing Science, INFORMS, vol. 16(1), pages 60-80.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:17:y:1998:i:1:p:66-88. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.