A Theoretical Rationale for Everyday Low Pricing by Grocery Retailers

A Theoretical Rationale for Everyday Low Pricing by Grocery Retailers

By James M. Lattin, Gwendolyn Ortmeyer
1991Working Paper No. 1144

We present one possible rationale for the emergence of everyday low pricing (EDLP) as a competitive strategy in grocery retailing. Using a game theoretic model, we show that under certain circumstances two competing retailers choose different pricing strategies in order to segment the market. The promotional retailer periodically sets a low discount price to attract cherry-pickers (price-vigilant consumers who shop opportunistically); the EDLP retailer sets a constant price -- higher than the promotional retailer's discount price but lower than his average price -- to appeal to expected price shoppers (consumers who do not search for price information or shop opportunistically). The promotional retailer benefits from lower variable costs (by moving more product volume during periods of trade deal from the manufacturer); the EDLP retailer benefits from reducing the fixed costs associated with variable pricing. Our model also has implications for provision of store service and forward buying behavior by retailers in markets characterized by both promotional pricing and EDLP.