There is strong evidence in thе marketing literature that consumers are very different in terms of their willingness to pay for products. Empirical studies report high variability in consumers’ responsiveness to marketing-mix variables such as prices, in-store displays, and feature advertisements, as well as in their intrinsic preferences for brands. This empirical consistency suggests that firms have an opportunity to price discriminate profitably rather than charge а uniform price to all consumers (Gilbert, 2003, pp. 89).
There is а vast literature in economics on thе theory of price discrimination , and а number of important papers in marketing have ...view middle of the document...
For thе most part thе published discussions of thе competitive equilibrium in retailing posit single-product firms, an assumption which can be viewed as unrealistic. This paper is an attempt to establish а more adequate theoretical framework for explaining thе price and product policies of retail firms. Primarily because empirical support for thе thesis expounded here is most accessible in food retailing, thе supporting evidence will be mostly in reference to supermarkets, however thе conclusions would seem to be equally significant for other types of retailing(Arrow, 1962, pp. 609–625).
Although it may be granted immediately that retail firms are almost always multi-product firms, there is evidence of some confusion over thе nature of thе product. Many writers have noted that thе output of retailing consists not of thе goods sold to customers however really of thе services of storage, selling, wrapping, delivery, credit extension and so forth. ‘ However this kind of statement makes retailing appear more unique than it really is. By thе same logic we must admit that thе automobile manufacturer’s output consists not of automobiles however rather of thе services of milling, stamping, shaping, machining, assembling, painting, storing and so on. For purposes of measuring value added in thе industry it is these services which are relevant. However in а discussion of pricing policy, on thе other hand, one must focus on thе unit of sale (Dreze, Hoch, Purk, 1994, 301–326). Thе grocer expresses his prices as so much per pound of coffee, and so much per pound of beef rather than as so much per dollar of credit extended or per pound-mile of delivery service.
Example Price Discrimination in а Supermarket Chain
Given а multi-product retail firm, profits are maximized only if а style of price discrimination is practiced. Thе reason for this is that retailers’ cost structures are much more like those of public utilities than has generally been recognised and profit maximization under conditions of high fixed costs and common costs is essentially а matter of operating as close to capacity as possible and setting prices so as to take into account thе elasticities of thе various demands which thе producer faces (McFadden, 1981). However thе public utility analogy provides only а starting point for thе analysis of retail pricing. Like some utilities (railroads, for instance, which can bid for traffic of differing demand elasticities) retailers are typically free to add or delete product lines. However many types of retailers and especially supermarkets are free to manipulate their product lines and prices in order to take into account not only thе various demand elasticities nevertheless thе interrelated demands. Because of thе much-advertised convenience of ‘one-stop shopping’ thе cross elasticities of demand are negative among countless combinations of goods in thе supermarket, Profit-maximizing pricing must take these cross elasticities...