The effect of competition on pricing and product positioning: Evidence from wholesale club entry

Abstract

This paper empirically examines incumbents’ reactions to market entry along price and non-price dimensions in the example of wholesale warehouse entry into grocery retail markets. Leveraging a detailed retail panel spanning 2001–2011 and a novel dataset documenting opening and closing dates and locations of all Costco warehouse clubs, we classify incumbent retailers’ strategic responses (e.g., pricing, assortment) by the storability of product categories, controlling for persistent systematic differences across retailer–product combinations. We find that retailers are substantially affected by increased competition from wholesale club warehouse openings and in response increase the variability of their prices, consistent with adoption of the Hi–Lo pricing strategy. In addition, incumbent retailers’ strategic responses differ significantly across storability levels: They are more likely to increase prices and reduce assortments for highly storable products and decrease prices and increase assortments for less storable products. We extend our analysis by exploiting the spatial variations in our data and analyzing divergent market effects across geographical areas. We find significant geospatial differences in these strategic responses.