Pricing, competition, and welfare in the supermarket retail industry: theory and empirics

The dissertation comprises three essays that investigate market performance and seller behavior in the supermarket retail industry. The first essay empirically examines welfare effects of the informative price advertising in the supermarket retail industry, using structural estimation approaches and individual scanner data. The simulation results numerically show that the private promotion intensities are socially excessive. The welfare implications of price advertising are determined by the two opposite effects of price advertising: (1) the informing and therefore welfare-improving effect, and (2) the welfare-harming effect of higher transportation costs incurred by consumers when promotions are used as a means of business stealing. In the second essay, I provide an analytical model for the rationale behind supermarket pricing patterns characterized by long-term high prices and temporary price reductions. The models features oligopoly retailers selling a homogeneous storable good that can be consumed for multiple periods, with consumer heterogeneity with respect to search cost, inventory cost, and store loyalty. In the symmetric Markov-perfect equilibrium (MPE) found, retailers randomize prices, and consumer purchase decisions are characterized by a critical price. The Markov transition of states is non-absorbing: the probability of holding a sale is low at high inventory levels, while at zero inventory retailers compete the hardest. The model is able to generate endogenous temporary price reductions and cyclical inventory variations. In the third essay, I consider forward-looking purchase and pricing behavior. Consumers maximize the expected discounted future utility flows by balancing inventory cost and potential future savings, and a monopolistic retailer maximizes the present expected profit flows by making a pricing decision that accounts for consumer stockpiling behavior. I estimate the model with data from the laundry detergent market using a simulated minimum distance (SMD) estimator. The simulated market evolution implies that, when consumer inventory level is high and therefore the incentive of purchase is small, the retailer smooths its profit flow by lowering prices to induce purchase; when consumer inventory is low, the retailer expects a high demand driven by urgent consumption needs but tends to keep price high in order to preserve future demand.Ph.D.Includes bibliographical referencesby Cixiu Ga