Everyday Low Price Research Articles

Store price promotion strategies: an empirical study from Chile

Purpose The purpose of this paper is to examine two popular price promotion strategies – price matching guarantees (PMGs) and everyday low prices (EDLP) – and their effects on Chilean consumer behavior in terms of consumer perceptions of low prices, search behavior and purchase intention. Design/methodology/approach A quasi experiment with three scenarios was conducted to test price promotion effects. Subjects were instructed to respond a questionnaire that included the dependent variables. Findings Results show that EDLP and PMG strategies increase perceptions of low prices and affect purchase intentions. These effects are significantly higher for stores offering EDLP than PMG. However, when consumers are exposed to two or more price promotion strategies (rather than one) they reduce their purchase intentions for a specific store and increase their search intentions. Research limitations/implications This is an initial study exploring the effects of price promotion strategies on consumers. Future research could test the hypotheses advanced in the study across different samples and contexts (supermarkets, department stores, convenience stores, and other retailers) and might privilege external validity, using experiments mimicking decisions with real consequences. Practical implications Retailers and marketers in Latin America – particularly those companies stressing price or value as their differential advantage – should consider the use of price promotions when designing marketing strategies. On the other hand, retailers should be aware that an intensive use of these of promotions could lead to increases in consumer search behavior. Originality/value While findings from the USA suggest that price promotion strategies can be effective in several contexts, there has been a limited number of studies addressing whether such strategies are effective in other countries, particularly in Latin America and emerging nations.

Multi-period price promotions in a single-supplier, multi-retailer supply chain under asymmetric demand information

This paper considers a two-stage supply chain in which a supplier serves a set of stores in a retail chain. We consider a two-stage Stackelberg game in which the supplier must set price discounts for each period of a finite planning horizon under uncertainty in retail-store demand. As a mechanism to stimulate sales, the supplier offers periodic off-invoice price discounts to the retail chain. Based on the price discounts offered by the supplier, and after store demand uncertainty is resolved, the retail chain determines individual store order quantities in each period. Because the supplier offers store-specific prices, the retailer may ship inventory between stores, a practice known as diverting. We demonstrate that, despite the resulting bullwhip effect and associated costs, a carefully designed price promotion scheme can improve the supplier’s profit when compared to the case of everyday low pricing (EDLP). We model this problem as a stochastic bilevel optimization problem with a bilinear objective at each level and with linear constraints. We provide an exact solution method based on a Reformulation-Linearization Technique (RLT). In addition, we compare our solution approach with a widely used heuristic and another exact solution method developed by Al-Khayyal (Eur. J. Oper. Res. 60(3):306–314, 1992) in order to benchmark its quality.

Competition and evolution in multi-product supply chains: An agent-based retailer model

Facing such issues as demand uncertainty and in- and cross-channel competition, managers of today's retail chains are keen to find optimal strategies that help their firms to adapt to the increasingly competitive business environment. To help retail managers to address their challenges, we propose in this paper an agent-based retail model (ARM), grounded in complex adaptive systems, which comprises three types of agents, namely suppliers, retailers, and consumers. We derive the agents' optimal behaviours in response to competition by evaluating the evolutionary behaviour of the ARM using optimisation methods and genetic algorithm. We find that consumers' ability to collect pricing information has a significant effect on the degree of competition in retail chains. In addition, we find that the everyday low price (EDLP) strategy emerges from the evolutionary behaviour of the ARM as the dominant pricing strategy in multi-product retail chains.

New Trends in Globalisation: An Examination of the Brazilian Case

This analysis looks at the role of Wal-Mart in Brazil by using glocalisation theory. Glocalisation refers to the strategies and practices adopted by transnational corporations to cater to local cultures and customs. In the case of Wal-Mart in Brazil, it unsuccessfully attempted to impose the US strategy of management practices, employee standards, low wages, EDLP (every-day-low pricing) for buyers, fierce pressure on suppliers, harsh anti-union policies and aggressive expansionism tendencies. In this, Wal-Mart was met with heavy resistance because it failed to glocalise. However, Wal-Mart changed tack or ‘compromised’ by following glocalisation principles and made deep inroads in the Brazilian market. This analysis is important for two reasons. First because it analyses the functioning of a giant corporation that ventured into unchartered territory from a theoretical perspective; an endeavour that has few scholars have hitherto undertaken. Second, in recent years, there has been scant consideration of the Brazilian market and its role in the global retailing process.

Markdown or Everyday Low Price? The Role of Behavioral Motives

We study a seller’s optimal pricing and inventory strategies when behavioral (nonpecuniary) motives affect consumers’ purchase decisions. In particular, the seller chooses between two pricing strategies, markdown or everyday low price, and determines the optimal prices and inventory level. Two salient behavioral motives that impact consumers’ purchase decisions and the seller’s optimal strategies are anticipated regret and misperception of product availability. Regret arises when a consumer initially chooses to wait but encounters stockout later, or when the consumer buys the product at the high price but realizes that the product is still available at the markdown price. In addition, consumers often perceive the product’s future availability to be different than its actual availability. We determine and quantify that both regret and availability misperception have significant operational and profit implications for the seller. For example, ignoring these behavioral factors can result in up to 10% profit losses. We contrast the roles of consumers’ strategic (pecuniary) motives with their behavioral (nonpecuniary) motives in affecting purchase, pricing, and inventory decisions. The presence of the behavioral motives reinstates the profitability of markdown over everyday low price, in sharp contrast to prior studies of only strategic motives that suggest the contrary. We characterize how and why strategic versus behavioral motives affect decisions in distinctive manners. In doing so, this paper also introduces and determines the behavioral benefits of pricing in leveraging consumers’ behavioral regularities. We advocate that tactics that may intensify consumers’ misperception of availability, such as disclosing low inventory levels, can have a far-reaching impact on improving the seller’s profit. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2147 . This paper was accepted by Yossi Aviv, operations management.

Has the 'Golden Rule' Lost its Aura? Revisiting Multimarket Contact in the U.S. Domestic Airline Industry

A seminal work in the mid-nineties finds that airlines charge higher fares in markets where they engage in extensive multimarket contact, thus empirically attesting to industry expert claims that airlines live by the 'golden rule' (i.e., avoid undercutting in jointly contested routes). Our research revisits this hypothesis by including two hitherto ignored airlines Southwest Airlines and JetBlue Airways who are practitioners of the everyday low price (EDLP) strategy. We find that this golden rule is violated when airlines engage in multimarket contact with these two airlines, and identify firm-specific differences in the overall pricing strategy as the source of this anomaly.

Pricing Strategy and Technology Choices: An Empirical Investigation of 'Everyday Low Price' in the Domestic US Airline Sector

There is a rich literature in economics on factors that govern airline prices. With approximately 50% of airline tickets sold online, there is now a renewed interest in investigating airline pricing particularly amongst Information Systems (IS) researchers. While market transparency created by online travel agents (OTAs) is a motivation enough to re-examine airline pricing, one missing piece calls for a thorough empirical investigation: In all extant studies (economics, marketing and IS), pricing by two major airlines, Southwest and JetBlue, has been ignored. Of particular interest to IS researchers is the fact that these two airlines practice a unique form of pricing called Everyday Low Price (EDLP) and have made certain technology-related choices that are distinct and different from previously studied carriers. We test extant theories of price discrimination in the new online context with both posted and transacted prices, including those of the two EDLP airlines. We find that the EDLP airlines demonstrate distinctly different pricing choices – they are very particular about maintaining price consistency, while except in the case of advance purchase, they forgo other conventional opportunities to price discriminate. They also aggressively undercut competition when equipped with certain cost advantages. Further empirical investigation reveals why EDLP airlines forgo participation in OTAs that potentially offer a larger market. In particular, while promising a larger marketplace, OTAs have the ability to reveal the lowest prices in the market; we find that EDLP prices are lowest in the market only 26% of the time – in other words, consumers have 70% chances of obtaining a better deal from other 'non-low price' airlines for any given ticket. We also show that EDLP prices, though not necessarily being the lowest in the market, do tend towards the lower end of the market spectrum.

Price promotions, operations cost, and profit in a two-stage supply chain

The phenomenon in which demand variability increases as one moves upstream in the supply chain has been often observed in practice. This so-called “bullwhip effect” often increases upstream operations costs, including inventory holding and transportation costs. Price variations are considered to be one of the primary causes of the bullwhip effect, and thus everyday low price (EDLP) strategies are commonly recommended to counter the negative impacts of the bullwhip effect. However, trade promotions continue to play an important role in the U.S. supermarket industry as well as other industries. This paper investigates this apparent inconsistency between the literature and practice by employing a deterministic, two-stage supply chain model composed of a single supplier and a single retailer. We demonstrate that even though the use of trade promotions can indeed increase a retailer's and supplier's operations costs, these costs may be more than offset by increased revenues, even in the absence of explicit coordination. That is, if the supplier judiciously applies a trade promotion strategy and the retailer passes some of this discount to its customers, then under certain conditions, the resulting supply chain profit can exceed that under an EDLP strategy. We provide a broad set of computational results that validate this conclusion and discuss the resulting managerial insights.

Food‐Retail Development and the Myth of Everyday Low Prices: The Case of Brazil

This article analyses the changes in Brazilian food retailing by investigating the co‐existence of, and the pricing variation across, large supermarket chains and small independent supermarkets. It uses cointegration tests to show that, despite the widespread belief that small supermarkets are inefficient and charge higher prices, they in fact charge lower prices. Accordingly, in contrast to the prevailing literature on food‐retail development, competition in food retail is complex and cannot be described as a simple Darwinian process of market concentration. The article explores the survival of small retail and its consequences for the current discussion on modern food retail in developing countries.

Building trust to increase purchase intentions: The signaling impact of low pricing policies

We examine the differential signaling impact of two low pricing policies, Price Matching Guarantees and Everyday Low Prices, on consumers' trusting beliefs and purchase intentions. We demonstrate that both PMG and EDLP pricing policies signal stores' ability to offer lower prices. However, whether these sellers were perceived as benevolent, and—consequently—consumers' purchase intentions, varied critically depending upon price uncertainty. Perceived benevolence and purchase intentions were significantly higher [lower] for sellers offering PMG than EDLP when price dispersion was high [low]. Our findings offer insights into whether and under what conditions firms should adopt these low pricing policies.

Consumer Demand for Variety: Intertemporal Effects of Consumption, Product Switching and Pricing Policies

The concept of diminishing marginal utility is a cornerstone of economic theory. The consumption of a good typically creates satiation that diminishes the marginal utility of consuming more. Temporal satiation induces consumers to increase their stimulation level by seeking variety and therefore substitute towards other goods (substitutability across time) or other differentiated versions (products) of the good (substitutability across products). The literature on variety-seeking has developed along two strands, each focusing on only one type of substitutability. I specify a demand model that attempts to link these two strands of the literature. This issue is economically relevant because both types of substitutability are important for retailers and manufacturers in designing intertemporal price discrimination strategies. The consumer demand model specified allows consumption to have an enduring effect and the marginal utility of the different products to vary over consumption occasions. Consumers are assumed to make rational purchase decisions by taking into account, not only current and future satiation levels, but also prices and product choices. I then use the model to evaluate the demand implications of a major pricing policy change from hi-low pricing to an everyday low pricing strategy. I find evidence that consumption has a lasting effect on utility that induces substitutability across time and that the median consumer has a taste for variety in her product decisions. Consumers are found to be forward-looking with respect to the duration since the last purchase, to price expectations and product choices. Pricing policy simulations suggest that retailers may increase revenue by reducing the variance of prices, but that lowering the everyday level of prices may be unprofitable.

Market Structure Across Retail Formats

We study how market structure within a product category varies across retail formats. Building on the literature on internal market structure, we estimate a joint store and brand choice model where the loading matrix of brand attributes are allowed to be retail format specific. The approach allows us to recover brand maps for different retail formats while controlling for the short-term marketing mix activities at these stores and the self-selection of households that frequent a particular format. The model is applied to consumer panel data from two product categories, where households are observed to make purchases across three store types: high-end grocery store, traditional supermarket, and large everyday low pricing (EDLP) formats. Our results show strong correlations between the marketing mix sensitivities, store format preference, and unobserved brand attributes. These correlations translate into significant differences in market structure across retail formats and in the direction and size of preference vectors for unobservable brand attributes. We find a tight clustering of brands at the EDLP format, whereas brands are found to compete in distinct subgroups at other stores. Results show that failure to account for retail format effects can substantially bias the understanding of underlying market structure and could lead to incorrect implications in applications such as new product entry.

The Price Matching Guarantee: The Effect of the Refund Size and the Moderator Role of the Retailer Price Strategy

This research builds on the signal theory to predict that an EDLP (Every Day Low Price) strategy will influence a consumer's perception of a low-price guarantee. The results of a study show that an EDLP retailer may offer a high refund because this will produce high credibility. However, a high refund offered without an EDLP will lead to lower credibility which, in turn, reduces the value and the consumer's buying intention.

Wal-Mart Korea: Challenges of Entering a Foreign Market

ABSTRACT Wal-Mart entered South Korea in late 1990s for its international expansion; however, IT had a major failure in this market and left Korea in 2005 as the American way of marketing did not translate well in Korea. Wal-Mart had critical shortfalls in enabling value exchange with the Korean consumers as the Korean consumers had significantly different taste and preferences compared to American consumers. Wal-Mart's Every Day Low Price (EDLP) strategy was not perceived to have the “value” in the minds of the Korean consumers, while its store locations were not strategically well positioned to create sufficient customer traffic. Wal-Mart's competitive advantage of low cost and low price was not suitable in the Korean competition and consumption context. Wal-Mart was not prepared to develop an effective localization strategy that might have stemmed from not having a clear projection of how much it was willing to invest and grow in this market. This Wal-Mart Korean case shows the importance of the compatibility of a corporate unique value proposition and strategic fit with the local market conditions.

Evaluating consumer response to EDLPs

This paper reports on an investigation of factors influencing consumer response to every-day low prices (EDLP) policies. In study 1, an experimental study, sale proneness was found to have a significant effect on attitude toward EDLP and patronage intentions for the store implementing a new EDLP policy. Store loyalty affected patronage intentions but not attitude toward the EDLP. While there were no significant interactions between sale proneness and store loyalty, follow-up univariate tests revealed that consumers’ level of sale proneness has an impact on attitude toward the EDLP policy when store loyalty is low but not when store loyalty is high. In a follow-up survey, a number of predictions regarding the relationships among sale proneness, store loyalty, and income level and the dependent variables of attitude toward EDLP, attitude toward the retailer, and patronage intentions were made and tested. Support was found for all but two of the 9 hypotheses. Implications of the findings for retailers and future research agendas are discussed.

Price competition during and after promotions

AbstractWe provide a framework for setting regular prices and using promotional discounts in a duopoly where long‐term promotional effects are present and the firms' pricing and promotional strategies are common knowledge (e.g., as in online markets). We show that at equilibrium, the two firms may not promote and instead adopt an Everyday Low Price (EDLP) strategy. Consumers' tendency to stockpile promoted products, the level of brand loyalty and product differentiation, and the possibility of a postpromotional sales increase critically influence regular prices, price discount rates, and profits. Under some conditions consumer stockpiling intensifies promotional competition and reduces firms' profits while the possibility of attracting new consumers reduces the need to heavily promote and ensures better profits. Managerial implications are discussed. Copyright © 2007 ASAC. Published by John Wiley & Sons, Ltd.

Strategic Implementation of 'Everyday Low Price' in Electronic Markets: A Study of Airline Pricing on the Internet

An Everyday Low Price (EDLP) strategy is a product-portfolio level pricing strategy by which a firm attempts to convey to consumers that prices across its product portfolio are consistently low. Empirically, the EDLP strategy is operationalized along two dimensions; the “everyday” component, which relates to the consistency in product prices over time, and the “low price” component, which implies that the prices set are on average lower than other prices available in the market. There may, however, be specific categories or markets in which even EDLP firms may prefer to eschew their consistency and low price goals. The U.S. domestic airline industry has two airlines that adopt the EDLP format while most others employ a promotional (HILO) pricing strategy, thus providing a rich context to investigate how the EDLP price-image strategy is implemented. We use a web crawler to gather information on over 270,000 ticket prices offered by the major airlines in 472 markets, and use a hierarchical linear model to analyze how these two dimensions of price vary with ticket categories and market conditions – defined in economics literature by advance purchase periods, weekend restrictions, airlines’ competitiveness, market distance, and hub operations. We find that the EDLP airlines emphasize the everyday dimension of their pricing much more than the low price dimension. Thus while their prices are systematically more consistent than their HILO competitors, their price levels show that they practice the same form of price discrimination with advance-purchase periods as their HILO competitors. Interestingly, while most airlines charge higher prices for tickets without weekend restriction, which are typically targeted towards business travelers, EDLP firms charge lower prices for these tickets. Further investigation at a category level reveals that these lower business fares are distinct features of short-haul markets where EDLP firms are known to enjoy certain cost advantages due to smaller equipment sizes of their flights. From the “everyday” point of view, we see that while there are no differences in the consistency of prices of EDLP tickets based on advance purchase periods, prices of business-focused EDLP tickets are distinctly more consistent than those of leisure-oriented tickets. Curiously, even in markets where EDLP firms are monopolists, they do not appear to be exercising their monopoly power; on the other hand, HILO firms distinctly employ discriminatory pricing in their monopoly markets. Perhaps this is a reflection of EDLP firms pursuing a limit-pricing/barrier-to-entry strategy. Our research shows that the practice of EDLP in online markets involves strategic variations in how price image is communicated.

The impact of pricing policy on sales variability in a supermarket retail context

The bullwhip effect is recognized to be a significant cost driver in supply chains. One of the measures proposed frequently to counter bullwhip effect is price stability, through everyday low pricing (EDLP). However, this study suggests that with an auto-regressive (AR1) demand process, the use of constant, instead of dynamic pricing may result in lower profitability and higher-demand volatility. An optimal price and stocking level policy is developed with normally distributed demand in this study and the model is tested using parameters from a supermarket scanner data set to determine the impact of two pricing policies. The hypothesis that low prior-period demand leads to discounted pricing is also tested and partially supported.

The Bully of Bentonville: How the High Cost of Wal-Mart's Everyday Low Prices is Hurting America. Anthony Bianco

The Bully of Bentonville: How the High Cost of Wal-Mart's Everyday Low Prices is Hurting America. Anthony Bianco

Política de preços e diferencial competitivo: um estudo de casos múltiplos na indústria de varejo

Considering all marketing mix variables, price is the one that most rapidly affects competition, sales volume, margin and profitability of retail companies. However, there are only a few studies that have tried to understand the price policies actually adopted. This paper presents the results of an exploratory research, based on a literature review, aiming at identifying price policies adopted by expressive national and foreign retail companies: Extra, Makro, Lojas Marisa, Castorama, Saraiva e Siciliano. The most commonly adopted price policy is High Low Price (HILO) due to the fact that the consumer is more sensible to price promotions than to the promise or compromise of everyday low price.