Repositioning Dynamics and Pricing Strategy

By Harikesh S. NairPaul EllicksonSanjog Misra
2010| Working Paper No. 2075

We measure the revenue and cost implications to supermarkets of changing their price positioning strategy in oligopolistic downstream retail markets. Our approach formally incorporates the dynamics induced by the repositioning in a model with strategic interaction. We exploit a unique dataset containing the price-format decisions of all U.S. supermarkets in the 1990s. The data contain the format-change decisions of supermarkets in response to a large shock to their local market positions: the entry of Walmart. We exploit the responses of retailers to Walmart entry to infer the cost of changing pricing-formats using a “revealed-preference” argument similar in spirit to Bresnahan and Reiss (1991). The interaction between retailers and Walmart in each market is modeled as a dynamic game. We found evidence that entry by Walmart had a significant impact on the costs and incidence of switching pricing strategy. Our results add to the marketing literature on the organization of retail markets, and have implications for long run market structure in the supermarket industry. Our approach, which incorporates long-run dynamic consequences, strategic interaction, and sunk investment costs, may be used to model empirically for positioning decisions in Marketing, more generally.

dynamic games
price rigidity