Retail Market Power in a Shopping Basket Model of Supermarket Competition |
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Authors: | Timothy J Richards Stephen F Hamilton Koichi Yonezawa |
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Institution: | 1. Morrison School of Agribusiness, W. P. Carey School of Business, Arizona State University, United States;2. Department of Economics, Orfalea College of Business, California Polytechnic State University San Luis Obispo, United States;3. Charles H. Dyson School of Applied Economics and Management, SC Johnson College of Business, Cornell University, United States |
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Abstract: | Supermarket retailers typically operate with relatively low margins, suggesting a highly competitive retail environment. However, despite the fact that consumers purchase an entire shopping basket at a time from supermarkets, this evidence is largely based on models of retail competition with single-category purchases. In this paper, we develop and test an empirical model of retail price competition that explicitly accounts for the effect of demand complementarity among items in consumer shopping baskets. Relative to the case where consumers purchase products with independent demands, we demonstrate that equilibrium prices are higher for all items when retailers take demand-complementarity into account. Our findings indicate that non-price strategies intended to encourage complementarity, such as co-merchandising, strategic shelf-positioning, or featuring complementary goods tend to soften price competition, and lead to higher equilibrium prices. |
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Keywords: | D43 L13 L81 M31 Complementarity Retailing Pricing Supermarkets Oligopolies |
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