Supermarket Pricing Strategies

Abstract

Most supermarket firms choose to position themselves by offering either everyday low prices (EDLP) across several items or offering temporary price reductions (promotions) on a limited range of items. While this choice has been addressed from a theoretical perspective in both the marketing and economic literature, relatively little is known about how these decisions are made in practice, especially within a competitive environment. This paper exploits a unique store level data set consisting of every supermarket operating in the United States in 1998. For each of these stores, we observe the pricing strategy the firm has chosen to follow, as reported by the firm itself. Using a system of simultaneous discrete choice models, we estimate each store's choice of pricing strategy as a static discrete game of incomplete information. In contrast to the predictions of the theoretical literature, we find strong evidence that firms cluster by strategy by choosing actions that agree with those of its rivals. We also find a significant impact of various demographic and store/chain characteristics, providing some qualified support for several specific predictions from marketing theory.