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Balancing Profitability and Customer Welfare in a Supermarket Chain

  • Pradeep Chintagunta

    ()

  • Jean-Pierre Dubé

    ()

  • Vishal Singh

    ()

We investigate the impact of price discrimination by a large Chicago supermarket chain. First we measure the impact of the chain's current zone-pricing policy on shelf prices, variable profits and consumer welfare across its stores. Using the chain's database to simulate a finer store-specific micro-pricing policy, we study the implications of this policy on profits and welfare. We show how a store-pricing policy that is constrained to offer consumers at least as much surplus as a uniform chain wide pricing policy still enables the retailer to generate substantial incremental profits. To ensure our pricing problem exhibits a well-defined optimum, we use the parsimonious, mixed-logit demand function that allows for flexible substitution patterns across brands and also retains a link to consumer theory. We discuss the issue of price endogeneity when estimating the demand parameters with weekly store-level data. Standard instrumental variables techniques used to account for such endogeneity also seem to increase the magnitudes of own-price elasticities thereby offsetting the problem encountered by previous researchers of predicted prices from a demand model exceeding those in the actual data. Copyright Kluwer Academic Publishers 2003

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File URL: http://hdl.handle.net/10.1023/A:1023534028314
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Article provided by Springer in its journal Quantitative Marketing and Economics.

Volume (Year): 1 (2003)
Issue (Month): 1 (March)
Pages: 111-147

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Handle: RePEc:kap:qmktec:v:1:y:2003:i:1:p:111-147
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  1. J. Miguel Villas-Boas & Russell S. Winer, 1999. "Endogeneity in Brand Choice Models," Management Science, INFORMS, vol. 45(10), pages 1324-1338, October.
  2. Aviv Nevo, 2003. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Microeconomics 0303006, EconWPA.
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  4. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
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  7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  8. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February.
  9. Alan L. Montgomery & Eric T. Bradlow, 1999. "Why Analyst Overconfidence About the Functional Form of Demand Models Can Lead to Overpricing," Marketing Science, INFORMS, vol. 18(4), pages 569-583.
  10. Jaehwan Kim & Greg M. Allenby & Peter E. Rossi, 2002. "Modeling Consumer Demand for Variety," Marketing Science, INFORMS, vol. 21(3), pages 229-250, December.
  11. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  12. K. Sudhir, 2001. "Competitive Pricing Behavior in the Auto Market: A Structural Analysis," Marketing Science, INFORMS, vol. 20(1), pages 42-60, January.
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