PRADEEP K. CHINTAGUNTA*
In studying retailer pricing behavior, researchers typically assume that retailers maximize profits across all brands in a focal product category. In this article, the author attempts to study empirically the extent to which three factors affect retail prices: (1) the effects of payments from manufacturers to the retailer other than regular promotions, as well as the effects of additional costs borne by the retailer for these brands; (2) the retailer’s objectives specific to its store brand, such as maximizing store brand share; and (3) the effects of retail competition and store traffic. By specifying a demand function at the brand-chain level for each brand in the product category, the author derives pricing rules for the retailer. The author decomposes the retail price of a brand into effects due to wholesale price, markup (obtained from the demand functions), additional promotional payments, retail competition, and the retailer’s objectives for the store brand. The author carries out empirical analysis for a specific product category at a single retail grocery chain. The results indicate that the effects of the three factors vary across brands in the category.
Investigating Category Pricing Behavior at a Retail Chain
Studying retailer pricing behavior is an issue that has generated a great deal of interest in the marketing literature. Researchers have examined the issue from both theoretical (e.g., Choi 1991; Raju, Sethuraman, and Dhar 1995) and empirical (e.g., Tellis and Zufryden 1995) perspectives. Most studies assume that retailers set prices for different brands in a product category to maximize total category profits (see, e.g., Raju, Sethuraman, and Dhar 1995; Tellis and Zufryden 1995; Vilcassim and Chintagunta 1995). Although some recent studies have advocated examining profits across categories, the idea of maximizing profits at the category level appears to be the basis of most studies on retail pricing behavior. This objective is also consistent with the move toward category management as a way of doing business for both manufacturers and retailers (see, e.g., Zenor 1994). The theoretical literature on retail pricing (see Lal, Little, and Villas-Boas 1996; Lal and Villas-Boas 1998; Pesendorfer 2001) discusses several factors that determine a retailer’s price for a brand in a given week, at least for frequently purchased items such as those considered in this study. Two key drivers of these prices are (1) manufacturers’ actions (e.g., wholesale prices, promotional payments) and (2) retail competition. However, most of the empirical literature on retailer pricing has focused on only one of these decisions. For example, Tellis and Zufryden (1995) assume values for wholesale prices and then examine the effects of manufacturers’ actions on retail prices. Although Pesendorfer (2001) accommodates both factors in his theoretical formulation, the data he uses do not contain information on wholesale prices. In this article, I incorporate both of these factors that affect retailer pricing into a single empirical analysis. Thus, I build on the previous empirical literature on retailer pricing behavior (Gupta 1993; Kim, Blattberg, and Rossi 1995; Tellis and Zufryden 1995; Vilcassim and Chintagunta 1995; Zenor 1994). Whereas most previous research has focused on the prices the retailer should charge conditional on the estimated demand function parameters, my objective is to analyze whether observed retail prices reflect factors suggested in the literature. In carrying out this analysis, I also account for some additional empirical issues that arise because of the nature of the data at hand. I discuss these issues that could affect retailer pricing behavior in the context of the data available for the empirical analysis. The data are for one of two chains in a market dominated by these two grocery chains. At the chain level, for a particJournal of Marketing Research Vol. XXXIX (May 2002),...
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