Repositioning Dynamics and Pricing Strategy

Abstract

We measure the revenue and cost implications to supermarkets of changing their price positioning strategy in oligopolistic downstream retail markets. Our estimates have implications for long-run market structure in the supermarket industry, and for measuring the sources of price rigidity in the economy. We exploit a unique dataset containing the price-format decisions of all supermarkets in the U.S. The data contain the format-change decisions of supermarkets in response to a large shock to their local market positions: the entry of Wal-Mart. We exploit the responses of retailers to Wal-Mart entry to infer the cost of changing pricing-formats using a revealed-preference argument similar to the spirit of Bresnahan and Reiss (1991). The interaction between retailers and Wal-Mart in each market is modeled as a dynamic game. We find evidence that suggests the entry patterns of Wal-Mart had a significant impact on the costs and incidence of switching pricing strategy. Our results add to the marketing literature on the organization of retail markets, and to a new literature that discusses implications of marketing pricing decisions for macroeconomic studies of price rigidity. More generally, our approach which incorporates long-run dynamic consequences, strategic interaction, and sunk investment costs, outlines how the paradigm of dynamic games may be used to model empirically firms' positioning decisions in Marketing.