Pricing Behavior of Multi-Product Retailers

Authors:
Daniel Hosken and David Reiffen, March 1999 (Revised
Working Paper:
225

While retail sales are an important economic phenomenon, previous research has not explored how the multiproduct nature of consumers’ purchasing decisions affects the pricing dynamics of multiproduct retailers. In this paper, we first document the extent to which "sales", defined as temporary discounts in retail price, are a pervasive aspect of retailing and an important source of retail price variation. Using a large data set for 20 categories of grocery products across 30 U.S. metropolitan areas, we find that the majority of price changes and 25%-50% of retail price variation is the result of retail sales. We then develop a model describing the pricing dynamics of multiproduct retailers that is consistent with these empirical pricing regularities. Specifically, because consumers prefer to buy a bundle of goods from the same retailer, a given discount on any one good in the bundle will have a similar effect on consumers’ likelihood of visiting that retailer. This implies that discounts on goods sold by a single retailer are substitutes instruments for retailers, and factors that influence one good’s price will affect the pricing of other goods. Hence, if intertemporal price changes are a means of price discriminating (as suggested in the literature), the impact of these changes will be reflected in the prices of many goods, including even those for which discrimination is not feasible.