Quantitative Marketing and Economics

, Volume 1, Issue 1, pp 111–147

Balancing Profitability and Customer Welfare in a Supermarket Chain

  • Pradeep K. Chintagunta
  • Jean-Pierre Dubé
  • Vishal Singh
Article

Abstract

We investigate the impact of price discrimination by a large Chicago supermarket chain. First we measure the impact of the chain's current zone-pricing policy on shelf prices, variable profits and consumer welfare across its stores. Using the chain's database to simulate a finer store-specific micro-pricing policy, we study the implications of this policy on profits and welfare. We show how a store-pricing policy that is constrained to offer consumers at least as much surplus as a uniform chain wide pricing policy still enables the retailer to generate substantial incremental profits.

To ensure our pricing problem exhibits a well-defined optimum, we use the parsimonious, mixed-logit demand function that allows for flexible substitution patterns across brands and also retains a link to consumer theory. We discuss the issue of price endogeneity when estimating the demand parameters with weekly store-level data. Standard instrumental variables techniques used to account for such endogeneity also seem to increase the magnitudes of own-price elasticities thereby offsetting the problem encountered by previous researchers of predicted prices from a demand model exceeding those in the actual data.

price discrimination customer welfare demand modeling 

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Pradeep K. Chintagunta
    • 1
  • Jean-Pierre Dubé
    • 2
  • Vishal Singh
    • 3
  1. 1.Graduate School of BusinessUniversity of ChicagoChicagoUSA
  2. 2.Graduate School of BusinessUniversity of ChicagoChicago
  3. 3.Graduate School of Industrial AdministrationCarnegie Mellon UniversityPittsburgh

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