Balancing Profitability and Customer Welfare in a Supermarket Chain |
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Authors: | Chintagunta Pradeep K Dubé Jean-Pierre Singh Vishal |
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Institution: | (1) Graduate School of Business, University of Chicago, 1101 E. 58th Street, Chicago, IL 60637, USA;(2) Graduate School of Business, University of Chicago, 1101 East 58 Street, Chicago, IL, 60637;(3) Graduate School of Industrial Administration, Carnegie Mellon University, Schenley Park, Pittsburgh, PA, 15213 |
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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. |
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Keywords: | price discrimination customer welfare demand modeling |
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