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Chain-Store Competition: Customized vs. Uniform Pricing

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  • Dobson, Paul W.
  • Waterson, Michael

Abstract

Retail chains essentially practice one of two broad strategies in setting prices across their stores. The more straightforward is to set a chain- or country- wide price. Alternatively, managers of retail chains may customize prices to the store level according to local demand and competitive conditions. For example, a chain may price lower in a location with lower demand and/or more competition. However, despite having the ability to customize prices to local market conditions, some choose instead to commit to uniform pricing with a “one price policy” across their entire store network. As an illustration, we focus on UK supermarket chains. Is there an advantage to be gained from deliberately choosing not to price discriminate across locations? We show generally and illustrate through means of a specific model that there exists a strategic incentive to soften competition in competitive markets by committing not to customize prices at the store level and instead adopt uniform pricing across the store network, and to raise overall profits thereby. Furthermore, we characterize quite precisely the circumstances under which uniform pricing is, and is not, profitable and illustrate that under a range of circumstances uniform pricing may be the preferable strategy.

Suggested Citation

  • Dobson, Paul W. & Waterson, Michael, 2008. "Chain-Store Competition: Customized vs. Uniform Pricing," Economic Research Papers 269789, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269789
    DOI: 10.22004/ag.econ.269789
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    6. Beatrice Pagel & Christian Wey, 2013. "Unionization Structures in International Oligopoly," LABOUR, CEIS, vol. 27(1), pages 1-17, March.
    7. Freire, Tiago & Rudkin, Simon, 2019. "Healthy food diversity and supermarket interventions: Evidence from the Seacroft Intervention Study," Food Policy, Elsevier, vol. 83(C), pages 125-138.
    8. Sei Beom Won, 2017. "Two-dimensional price discrimination with uncertainty about willingness-to-pay," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 58(3), pages 513-541, May.
    9. Konur, Dinçer & Geunes, Joseph, 2018. "Supplier wholesale pricing for a retail chain: Analysis of identical market price functions," Omega, Elsevier, vol. 76(C), pages 38-46.
    10. Anett Weber & Winfried J. Steiner & Stefan Lang, 2017. "A comparison of semiparametric and heterogeneous store sales models for optimal category pricing," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 39(2), pages 403-445, March.

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