Retailer Dynamic Pricing Behavior:Their Impacts on Consumer Welfare

Yun Jeong Choi
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Yun Jeong Choi: Faculty of Economics, University of Tokyo

No CIRJE-F-367, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper examines retailers' dynamic pricing behavior in a competitive environment, using scanner data on the refrigerated orange juice category. Two factors may result in lower retail prices compared to static optimum prices at category-level profit maximization: (i) retailers' use of a loss leader strategy for national brands to attract more consumers, and (ii) retailers' desire to maximize store brand sales as well as category-level profit. Overall, demand volatility and the presence of store brands cause retailers to lower retail prices, thus enhancing consumer welfare. Meanwhile, during two exogenous (unfavorable) cost shock periods, the gaps between observed retail prices and static optimum prices increased. This paper suggests that retailers exhibit unique pricing behavior in the presence of store brands as well as demand and cost volatility. To avoid misinterpreting the degree of industry competition, the retailers' role in pricing should be fully understood.

Pages: 27 pages
Date: 2005-09
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2005cf367

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