Shopping Behavior and Consumer Preference for Store Price Format: Why 'Large Basket' Shoppers Prefer EDLP

Shopping Behavior and Consumer Preference for Store Price Format: Why 'Large Basket' Shoppers Prefer EDLP

By James M. Lattin, David Bell
1998Working Paper No. 1487

In recent years, the supermarket industry has become increasingly competitive. One outcome has been the proliferation of a variety of pricing formats, and considerable debate about how these formats affect consumers' store choice behavior. This paper addresses tow new and important questions concerning grocery shopping behavior, retail price format and sotre choice. First, after controlling for other factors (e.g., distance to the store, prior experience in the store, advertised specials), do consumer expectations about prices for a basket of grocery products ("expected basket attractiveness") influence the store choice decision? Second, are different pricing formats (EDLP or HILO) more or less attractive to different types of shoppers? Specifically, how do market basket decisions and purchase incidence behavior relate to store choice?_x000B__x000B_To answer these questions we develop a theory and empircal analysis of consumer shopping behavior under price uncertainty. In formulating the theory, we draw on previous work (e.g., Kahn and Schmittlein 1992) and segment shoppers according to their "expected basked size" on a shopping trip. This segmentation allows us to explain preference for EDLP and HILO store formats. We contend that the large basket shopper who has a higher probability of category purchase (for any given category) will prefer the format with a lower average basket price (EDLP). Conversely, the small basket shopper with a lower probability of category purchase (for any given category) will prefer the store with more price variation (HILO), even at higher average prices. We develop three propositions that formalize this intuition. A key structural implication of our theory is that large basked shoppers are less responsive to price in their individual category purchase incidence decisions; this makes them more responsive to the expected total basket price in their store choice decisions. Furthermore, an increase in the shopper's expected basket size will lead to an increase in preference for EDLP. In an extension to basic model, we show that for two shoppers with the same expected basked size per trip, but different trip frequencies, the more frequent shoppers will prefer HILO. _x000B__x000B_We test the propositions using a model of shopping behavior and a market basket scanner panel database from two markets with purchases from 1042 panelists. We find that even after controlling for important factors such as household distance to the store, previous experience in the store and advertised specials, price expectations for the basket influence store choice. Furthermore, EDLP store get a greater than expected share of business from large basket shoppers; HILO stores get a greater than expected share from small basket shoppers. Large basket shoppers are relatively price inelastic in their category purchase incidence decisions and price elastic in their store choice decisions. Finally, we use model parameters and output to gain additional insight into focal categories that influence price image for the store, and demographic characterisitcs of large and small basket shoppers.