Abstract
Consumers buy products from multiple categories in their regular shopping. Some prefer to buy from a single firm, which owns lots of retailers, generating cross-category demand interactions. To attract consumer, retailers set lower prices and sell tail brands in some categories (vertical differentiation), or alternatively they create unbranded products that they sell exclusively to earn a high markup (horizontal differentiation). To study supermarket pricing, I develop a multi-category multi-seller demand model and estimate it using the Nielsen Consumer Panel Dataset. I quantify cross-category pricing effects and find strong substitution between categories. Although horizontal differentiation is an importance source of profit, the profit mainly comes from vertical differentiation.
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