Comments on "A Theory for Pricing Nonfeatured Products in Supermarkets"

Abstract

Little and Shapiro (this issue) raise a number of provocative points in their paper, Theory for Pricing Nonfeatured Products in Supermarkets, which illustrate some of the commonalities between marketing and economics. Economists preach the principles of profit maximization and marginal cost-marginal revenue pricing, yet these concepts are often not reflected in marketing analyses of applied real-life problems. It is heartening, therefore, to see a marketing paper heavily dosed with economics. In the traditional role of a discussant, let me first briefly try to describe what I see as the central message of the Little-Shapiro paper. Their theoretical treatise addresses the problem of a supermarket manager faced with the task of setting prices for upwards of 6,000 products. They argue that although stores could take temporary advantage of their customers, their long-term success depends on building customer loyalty. Assuming a traditional well-behaved customer utility function, they derive the store pricing rule which maximizes store profits for a given level of customer utility. They also show that solving the dual to this problem-maximizing customer utility holding store profits constant-as expected yields the same pricing rule. Thus, in effect, the store's pricing problem can be reduced to two steps. First, for any given level of customer utility, find the price vector (not necessarily unique) which makes the store best off. Then, assuming the store knows how customer utility maps into patronage, select that level of utility which maximizes total store profits. These results are neither surprising nor new. Indeed, the analysis is similar to what I would expect if this problem were given to most economists. A far more interesting problem, and unfortunately one not pursued as fully by Little and Shapiro, is how in fact stores should (or do) implement a pricing policy. They argue that the incredible quantity of information needed for their kind of pricing rules has made it virtu-