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Balancing Profitability and Customer Welfare in a Supermarket Chain

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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.

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Authors and Affiliations

  1. Graduate School of Business, University of Chicago, 1101 E. 58th Street, Chicago, IL, 60637, USA

    Pradeep K. Chintagunta

  2. Graduate School of Business, University of Chicago, 1101 East 58 Street, Chicago, IL, 60637

    Jean-Pierre Dubé

  3. Graduate School of Industrial Administration, Carnegie Mellon University, Schenley Park, Pittsburgh, PA, 15213

    Vishal Singh

Authors
  1. Pradeep K. Chintagunta
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  2. Jean-Pierre Dubé
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  3. Vishal Singh
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Correspondence to Pradeep K. Chintagunta.

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Chintagunta, P.K., Dubé, JP. & Singh, V. Balancing Profitability and Customer Welfare in a Supermarket Chain. Quantitative Marketing and Economics 1, 111–147 (2003). https://doi.org/10.1023/A:1023534028314

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