Price dispersion and seller heterogeneity in retail food markets

Price dispersion, i.e. a homogeneous product being sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, alongside large supermarkets. The extent of observed price dispersion is quite high. When prices in an urban area (where the spatial concentration of sellers is higher) are compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition do not yield lower prices. Other counteracting factors, including differences in seller costs and consumer incomes, make prices, on average, higher in the urban area for 11 of the 14 products considered. For many, but not all, the products supermarkets proved to be less expensive than traditional retailers, although average savings from food shopping at supermarkets were extremely low. Finally, the results of the study provide evidence that retailers have different pricing strategies and these differences also emerge for supermarkets belonging to the same chain. The results presented in the paper suggest that a variety of factors play a role in explaining price dispersion. In addition to differences in seller costs, the contemporaneous heterogeneity of retailers (in terms of services provided) and consumers (in terms of search costs and preferences) makes the emergence of monopolistic competition possible as well as allowing small traditional food retailers to remain in business.     

Buyer power and exclusion in vertically related markets

Suppliers and consumer organizations have become increasingly concerned by the build-up of buyer power of retailers in many markets. A major concern is that strong retailers will abuse their power to exclude products and rival retailers from the market to be able to increase prices to consumers. As a consequence, remedies to limit buyer power are discussed and implemented in many countries. In this paper we compare the incentives for exclusion, and the effect on consumers prices, under both buyer and seller power. We study a model with a dominant upstream manufacturer and a competitive fringe of producers offering their products to two differentiated downstream retailers. We compare the equilibrium outcome of this model when i) the dominant supplier holds all the bargaining power, and (ii) the retailers have all the bargaining power. We show that full or partial exclusion of either the competitive product or downstream retailers occurs when inter and intrabrand competition are strong. This is true both under seller and buyer power. However, in contrast to the received literature, we find that buyer power weakly enhances welfare compared to seller power because buyer power will lead to both more product variety (less exclusion) and lower retail prices.     

The impact of shopbot use on prices and price dispersion: Evidence from online book retailing

Internet price search tools, notably shopbots, have reduced consumers' search costs for price and product characteristics. While a variety of analytic models predict that increased consumer search will lower price levels among competing retailers, there is no consensus in the literature as to how price dispersion will change with increased consumer search. Moreover, there are no papers that have empirically tested these predictions using direct observation of variation in shopbot use over time.This paper examines the impact of changes in shopbot use over time on pricing behavior in the Internet book market. We do this by combining price and clickstream data collected from August 1999 to July 2001 — a period of rapid expansion in shopbot use. We find that a 1% increase in shopbot use is correlated with a $0.41 decrease in price levels and a 1.1% decrease in price dispersion.     

An empirical analysis of competitive nonlinear pricing

We estimate a model of competitive nonlinear pricing with multidimensional preference heterogeneity using individual level data on advertisements bought by local businesses (e.g., doctors, electricians) from two Yellow Page Directories in one U.S. city-market. Variation in individual choices and payments allows us to identify the joint density of preferences, marginal costs of publishing and common utility parameters. Our estimates suggest substantial welfare loss due to asymmetric information. Comparing duopoly outcomes with (counterfactual) monopoly outcomes, we find that with less competition (i) producer surplus increases substantially; (ii) more “low-type” consumers are excluded; (iii) product variety increases, but benefits accrue only to the “high-type” consumers; (iv) total consumer surplus decreases; (v) but its distribution, across consumers, does not change.     

Consumer Decision-making at an Internet Shopbot: Brand Still Matters

Internet shopbots compare prices and service levels at competing retailers, creating a laboratory for analysing consumer choice. We analyse 20,268 shopbot consumers who select various books from 33 retailers over 69 days. Although each retailer offers a homogeneous product, we find that brand is an important determinant of consumer choice. The three most heavily branded retailers hold a $1.72 price advantage over more generic retailers in head-to-head price comparisons. In particular, we find that consumers use brand as a proxy for retailer credibility in non-contractible aspects of the product and service bundle, such as shipping reliability.     

Purchasing alliances and product variety

We analyze the impact of purchasing alliances on product variety and profit sharing in a setting, in which capacity constrained retailers operate in separated markets and select their assortment in a set of differentiated products offered by heterogeneous suppliers (multinationals vs. local SMEs). Retailers may either have independent listing strategies or build a buying group, thereby committing to a joint listing strategy. This alliance may cover the whole product line (full buying group) or only the products of large suppliers (partial buying group). We show that a buying group may enhance the retailers’ buyer power and reduce the overall product variety to the detriment of consumers. Our most striking result is that partial buying groups do not protect the small suppliers from being excluded or from bearing profit losses; they may even be more profitable for retailers than full buying groups.     

Estimation of Search Frictions in the British Electricity Market

This paper studies consumer search and pricing behavior in the British domestic electricity market following its opening to competition in 1999. We develop a sequential search model in which an incumbent and an entrant group compete for consumers who find it costly to obtain information on prices other than from their current supplier. We use a large data set on prices and input costs to structurally estimate the model. Our estimates indicate that consumer search costs must be relatively high in order to rationalize observed pricing patterns. We confront our estimates with observed switching behavior and find they match well.     

进场费的政府规制效果分析——基于权力范式的渠道研究

近年来,进场费问题始终是零售商与供应商矛盾冲突的焦点,也是理论界和政策制定者关注的热点。本文基于经济学研究的权力范式,构造了以政府规制强度为外生变量的供应商与零售商博弈模型,从理论上分析了进场费的作用及限制进场费对零售商、供应商的决策行为和消费者福利的影响。结论是:进场费作为渠道利益分配调节机制,客观上具有传递零售终端竞争压力的作用。限制进场费会减少零售商的利润,但不一定增加供应商的利润,且有可能削弱供应商改进产品的动机和刺激零售商扩张销售网络。     

Search Costs and Price Dispersion in a Localized,Homogeneous Product Market: Some Empirical Evidence

Convenience stores provide an opportunity to compare the price dispersion that occurs for gasoline, which is characterized by relatively low search and information costs to consumers, with that of in-store items, which are characterized by relatively high search and information costs to consumers. The results obtained from this study support the hypothesis that differences in search and information costs for consumers play a significant role in explaining the observed price dispersion that occurs for homogeneous items sold at convenience stores.     

Price authority and information sharing with competing supply chains

We characterize the degree of price discretion that two competing manufacturers grant their retailers in a framework where demand is uncertain and privately observed by the retailers, while manufacturers only learn it probabilistically. In contrast with the consolidated vertical contracting literature, we assume that manufacturers cannot use monetary incentives to align the retailers’ incentives to pass on their unverifiable distribution costs to consumers. Our objective is to study how, in this context, an information-sharing agreement according to which manufacturers share their demand information affects prices, profits and consumer surplus. While equilibria with full price delegation never exist, regardless of whether manufacturers share information, partial delegation equilibria may exist with and without the exchange of information. These equilibria feature binding price caps (list prices) that prevent retailers from passing on their distribution costs to consumers, and are more likely to occur when manufacturers exchange demand information than when they do not share this information. Manufacturers profit from exchanging demand information when products are sufficiently differentiated, and retailers’ distribution costs are high enough. Yet, expected prices are unambiguously lower when manufacturers exchange demand information than when they don’t, making the information exchange beneficial to consumers.     

How Do Consumer Characteristics Affect the Bias in Measuring Willingness to Pay for Innovative Products?

Getting the price right is essential for successful new product introductions. An accurate estimate of consumers' willingness to pay is a crucial part of this task. Measurement of willingness to pay for innovations, however, often yields biased results. In this paper, we investigate consumer‐related characteristics and motives that might underlie this bias. Drawing on the elaboration likelihood model, we develop a conceptual model to identify consumer characteristics relevant for preference measurement for innovative products. In doing so, two main factors that potentially influence hypothetical bias are distinguished: ability and motivation. Our conceptual discussion and empirical results demonstrate that the validity of willingness to pay statements is higher among consumers who show a high ability to assess the new product's utility and who are truly interested in purchasing the new product. Counter to intuition, willingness to pay statements from innovators, consumers with good product category knowledge, or consumers who perceive the new product to be highly innovative are relatively more biased and should be interpreted with caution. This research is among the first to look at consumer characteristics rather than methodological issues when it comes to measuring consumer willingness to pay for innovative products. Our conceptual discussion and empirical examination of the drivers of hypothetical bias can be used to refine the validity of the results of the direct willingness to pay approach. These findings should help improve new product pricing surveys and open new avenues for research in measuring consumer preferences.     

Multiproduct retailing and consumer shopping behavior: The role of shopping costs

We empirically examine the role of shopping costs in consumer shopping behavior in a context of competing differentiated supermarkets that supply similar product lines. We develop and estimate a model of demand in which consumers can purchase multiple products from multiple stores in the same week, and incur transaction costs of dealing with supermarkets. We show that a similar model without shopping costs predicts a larger proportion of multistop shoppers and overestimates own-price elasticities and product markups. Further, we use our model along with a model of competition between supermarkets to study two practices that are commonly used by supermarkets: product delisting and loss-leader pricing. We show that the presence of shopping costs makes product delisting less profitable whereas it makes loss-leader pricing more profitable compared to a context in which consumers do not incur shopping costs.     

Do Out‐of‐State Buyers Pay More for Real Estate? An Examination of Anchoring‐Induced Bias and Search Costs

We explore the questions of whether and why out-of-state buyers pay more for real estate than their in-state counterparts. Theoretically, we develop a model capable of explaining a premium if out-of-state buyers have high search costs, upwardly biased beliefs about prices or an unusually short time horizon to purchase. Empirically, we find that out-of-state buyers pay a statistically significant and economically meaningful premium for apartment complexes in the Phoenix area. We also find some evidence consistent with the premium being driven by high search costs, biased beliefs (anchoring) and haste associated with out-of-state buyers.     

Vertical contracts in search markets

This paper studies a simple model to underline the importance of consumer search for understanding wholesale contracts between manufacturers and retailers. The model has one manufacturer and two retailers who compete in a homogeneous goods market where the wholesale contract is unobserved by consumers. If the manufacturer is in the position to offer two-part tariffs, the model without search either does not have an equilibrium wholesale contract (if retailers hold passive beliefs) due to the well-known opportunism problem or it is characterized by the absence of a fixed fee (when retailers hold symmetric beliefs). With consumer search, an equilibrium wholesale contract always exists (even if retailers hold passive beliefs) overcoming the opportunism problem and is always characterized by some fixed fee. If the manufacturer offers linear wholesale contracts, the differences between the models with and without consumer search are less pronounced, but remain even if the search cost vanishes. Thus, the vertical contracting literature cannot simply ignore search costs by saying that they are probably small and can therefore be neglected.     

The effect of competition on pricing and product positioning: Evidence from wholesale club entry

This paper empirically examines incumbents’ reactions to market entry along price and non-price dimensions in the example of wholesale warehouse entry into grocery retail markets. Leveraging a detailed retail panel spanning 2001–2011 and a novel dataset documenting opening and closing dates and locations of all Costco warehouse clubs, we classify incumbent retailers’ strategic responses (e.g., pricing, assortment) by the storability of product categories, controlling for persistent systematic differences across retailer–product combinations. We find that retailers are substantially affected by increased competition from wholesale club warehouse openings and in response increase the variability of their prices, consistent with adoption of the Hi–Lo pricing strategy. In addition, incumbent retailers’ strategic responses differ significantly across storability levels: They are more likely to increase prices and reduce assortments for highly storable products and decrease prices and increase assortments for less storable products. We extend our analysis by exploiting the spatial variations in our data and analyzing divergent market effects across geographical areas. We find significant geospatial differences in these strategic responses.     

Consumer Trial,Continuous Use,and Economic Benefits of a Retail Service Innovation: The Case of the Personal Shopping Assistant

Service innovations in retailing have the potential to benefit consumers as well as retailers. This research models key factors associated with the trial and continuous use of a specific self‐service technology (SST), the personal shopping assistant (PSA), and estimates retailer benefits from implementing that innovation. Based on theoretical insights from prior SST studies, diffusion of innovation literature, and the technology acceptance model (TAM), this study develops specific hypotheses and tests them on a sample of 104 actual users of the PSA and 345 nonusers who shopped at the retail store offering the PSA device. Results indicate that factors affecting initial trial are different from those affecting continuous use. More specifically, consumers' trust toward the retailer, novelty seeking, and market mavenism are positively related to trial, while technology anxiety hinders the likelihood of trying the PSA. Perceived ease of use of the device positively impacts continuous use while consumers' need for interaction in shopping environments reduces the likelihood of continuous use. Importantly, there is evidence on retailer benefits from introducing the innovation since consumers using the PSA tend to spend more during each shopping trip. However, given the high costs of technology, the payback period for recovery of investments in innovation depends largely upon continued use of the innovation by consumers. Important implications are provided for retailers considering investments in new in‐store service innovations. Incorporation of technology within physical stores affords opportunities for the retailer to reduce costs, while enhancing service provided to consumers. Therefore, service innovations in retailing have the potential to benefit consumers as well as retailers. This research models key factors associated with the trial and continuous use of a specific SST in the retail context, the PSA, and estimates retailer benefits from implementing that innovation. In so doing, the study contributes to the nascent area of research on SSTs in the retail sector. Based on theoretical insights from prior SST studies, diffusion of innovation literature, and the TAM, this study develops specific hypotheses regarding the (1) antecedent effects of technological anxiety, novelty seeking, market mavenism, and trust in the retailer on trial of the service innovation; (2) the effects of ease of use, perceived waiting time, and need for interaction on continuous use of the innovation; and (3) the effect of use of innovation on consumer spending at the store. The hypotheses were tested on a sample of 104 actual users of the PSA and 345 nonusers who shopped at the retail store offering the PSA device, one of the early adopters of PSA in Germany. Data were analyzed using logistic regression (antecedents of trial), multiple regression (antecedents of continuous use), and propensity score matching (assessing retailer benefits). Results indicate that factors affecting initial trial are different from those affecting continuous use. More specifically, consumers' trust toward the retailer, novelty seeking, and market mavenism are positively related to trial, while technology anxiety hinders the likelihood of trying the PSA. Perceived ease of use of the device positively impacts continuous use, while consumers' need for interaction in shopping environments reduces the likelihood of continuous use. Importantly, there is evidence on retailer benefits from introducing the innovation since consumers using the PSA tend to spend more during each shopping trip. However, given the high costs of technology, the payback period for recovery of investments in innovation depends largely upon continued use of the innovation by consumers. Important implications are provided for retailers considering investments in new in‐store service innovations. The study contributes to the literature through its (1) simultaneous examination of antecedents of trial and continuous usage of a specific SST, (2) the demonstration of economic benefits of SST introduction for the retailer, and (3) contribution to the stream of research on service innovation, as against product innovation.     

THE EFFECTS OF CAPACITY ON SALES UNDER ALTERNATIVE VERTICAL CONTRACTS*

Retailer capacity decisions can impact sales for products by affecting, for example, availability and visibility. Using data from the U.S. video rental industry, we report estimates of the effect of capacity on sales under alternative vertical contracts. New monitoring technologies facilitated new supply contracts in this industry, reducing upfront costs of capacity but requiring minimum capacity purchases, strongly impacting stocking decisions. We find that larger capacity (more tapes) for a given title can substantially increase rentals of that title; and that alternative vertical contractual forms for distributing tapes from studios to retailers strongly impacts the relationship between capacity and rentals.     

Cinematic Explosion: New Products,Unpredictabilty and Realized Quality in the Digital Era

While file sharing has undermined firms’ ability to generate revenue for their products, other technological change has reduced entry barriers in cultural industries, with substantial positive impacts on the availability of new books and recorded music. Unpredictability of product quality is a generic feature of cultural goods, including music, books and movies, so an infusion of new products holds the possibility of bringing not just low‐appeal products but also new products that consumers find highly appealing. This paper explores the effects of reduced costs of production, promotion and distribution in the motion picture industry, asking four questions. First, we document substantial growth in the number of movies brought to market, particularly since the early 2000's. Second, we document growth in institutions by which consumers can discover new movies, many of which are produced outside of the major studios and not released in theaters. Third, we show that the new independent movies account for a growing share of commercially successful movies. Finally, we present evidence, based on both critical assessments and usage, that recent vintages are more appealing to consumers than earlier offerings. These findings on movies echo developments documented elsewhere for recorded music and books.     

Alcohol Prohibition and Pricing at the Pump*

Firms often sell a transparent base product and a valuable add-on. If only some consumers are aware of the latter, the add-on's effect on the base product's price will be ambiguous. Cross-subsidization between products to bait uninformed consumers might lower, intrinsic utility from the add-on for informed consumers might raise the price. We study this trade-off in the gasoline market by exploiting an alcohol sales prohibition at stations as an exogenous shifter of add-on availability. Gasoline margins drop by 5% during the prohibition. The effect is mediated by shop variety and competition. Using traffic data, we unveil sizeable consumer-side reactions.     

Product substitution in different weights and brands considering customer segmentation and panic buying behavior

Due to recent supply disruptions, there has been a rapid increase in panic buying. This study considers a wholesaler selling two brands of a product with multiple weights and produced by different manufacturers to multiple retailers. The products are substituted based on weight (same brand) and a competitor’s brand over two periods. In the first period (panic situation), the wholesaler attempts to retain the inventory to satisfy the retailer. In the second period (supply disruption), retailers are willing to accept the substitute products. The wholesaler segregates the retailers into high and low indexed customers, where the high indexed retailers (provide higher profit) order greater quantities than the low indexed retailers. The objective of this model is to determine the optimal numbers for ordering quantities and substitutions to maximize total profit. Moreover, supply disruption for both single and multiple brands is analyzed, along with the influence of different degrees of supply disruption and panic rate on decisions and profits. Finally, we compare the models with and without customer-segmented substitution and brand substitution. In addition, other model extensions are discussed, such as an increase in the price in the second period.