Higher Exit Rates Research Articles

Price Behavior and Store Size in Grocery Retailing

The effects of different store sizes on relative prices are derived for three types of price behavior in grocery retailing. A theoretical model is formulated and estimated using prices collected by the Central Bureau of Statistics in Norway for the consumer price index. The results indicate that recommended prices are adopted to a large extent in all store sizes, as the general price levels did not differ significantly. However, the largest stores are demand oriented in the sense that products with a high share of the average household's budget were relatively lower priced, while the opposite was the case for less important products. The general markup level was adjusted to capture demand variations over the year. I. Introduction In grocery retailing, small stores have exhibited a high exit rate during the last couple of decades. At the same time, relatively large stores are prominent among the new entries. This development is a result of many factors which operate on both the supply and the demand side and has caused the average size of stores to increase and the total number of stores to decrease. On the demand side, one of the factors which has been proposed to explain the increasing tendency for consumers to patronize large stores is that they offer lower prices. However, store characteristics other than the general price level may account for the growth of large stores. As far as prices are concerned, the structure of prices may be more important than the general level of prices. The assortment of a grocery retailer usually contains more than a thousand items. Consequently, it is virtually impossible for consumers to consider all prices. Their attention is concentrated on the prices of a limited number of items which are used as cues for the overall price level. Demand at the store level is particularly elastic for some products and rather inelastic for others, as elaborated by Holton (1957). This makes it profitable to use different margins for different products. Furthermore, cross-price elasticities within the assortment should be taken into account if the aim is to maximize profits. The ability to set prices in accordance with demand relations may vary with store size. The largest stores probably have profes