The role of warehouse club membership fee in retail competition |
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Authors: | Sang-Hoon Kim S Chan Choi |
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Institution: | a Graduate School of Business, Seoul National University, San 56-1, Sillim-Dong, Kwanak-Gu, Seoul 151-742, South Korea b Rutgers Business School, Rutgers University, 180 University Ave, Newark, NJ 07102, United States |
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Abstract: | There are several explanations as to why warehouse clubs charge membership fees and how the fees play a role in the competitive landscape of the retail grocery market. We provide another insight into the nature of the membership fee using a model of price competition between a warehouse club and a supermarket. We show that the warehouse club's membership fee is an optimal competitive reaction to the supermarket's promotional activity. The more frequent the promotion is, the lower is the membership fee. However, the larger the promotion depth is, the higher is the fee. We show that the cherry-picker segment plays a key role behind these results. Our analysis not only provides a justification of warehouse club membership fees by discovering its duality with the cherry-picker segment but also gives managers several guidelines on yearly fee and retail price decisions. |
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Keywords: | Retailing Retail formats Warehouse club Price competition |
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