Balancing Profitability and Customer Welfare in a Supermarket Chain

Pradeep Chintagunta, Jean-Pierre Dubé () and Vishal Singh ()

Quantitative Marketing and Economics (QME), 2003, vol. 1, issue 1, 147 pages

Abstract: 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

Keywords: price discrimination; customer welfare; demand modeling (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (66)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:qmktec:v:1:y:2003:i:1:p:111-147

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DOI: 10.1023/A:1023534028314

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