Three Essays on Consumer Behavior and Firm Pricing Strategy in Grocery Retail Market

This dissertation consists of three essays focusing on consumer behavior and firms’ pricing strategies in the US retail grocery market. Its purpose is to investigate factors that influence consumer choices, and to shed light on firms’ pricing strategies that exploit consumer behavior. Its research provides insights into how policy interventions and historical purchases affect consumer preference concerning products, brands and stores, and how firms respond from both static and dynamic perspectives. First, it investigates how interventions such as health information and tax policy affect consumers’ preferences regarding products such as processed meat and sugar-sweetened beverages (SSBs). The first essay focuses on exploring how a report from International Agency for Research on Cancer(IARC) connecting consumption of processed meat to cancer affected consumer preferences regarding processed meat. The IARC announcement led to panicked headlines, while the impact it had on processed meat products is still unknown. In this essay, we compare changes in price, sales and revenue of processed meat before and after IARC report using the synthetic control method (SCM). We find a significant decrease in bacon prices and revenues in the wake of the IARC report release, but no evidence of a demand reduction for ham and sausage. At the same time, we find beef sales and revenue increased significantly after the report, while beef prices fell significantly. The second essay measures the economic response to a sugar-sweetened beverages (SSBs) tax from both theoretical and empirical perspectives. We investigated how cross-border shopping and a firm’s multiproduct nature reduce the tax pass-through rate. We find increased sales and revenue of SSBs and untaxed products in stores close to Philadelphia but not subject to tax. At the same time, we find stores with wider selection have lower tax pass-through rate, which is consistent with the theory of competition among multiproduct firms. This dissertation also explores the firm pricing strategy from a dynamic aspect. The third essay looks into how consumers choose brands given their historical purchases, which forms a type of brand loyalty coming from psychological switching costs when consumers switch brands. With the existence of switching costs, firms are forward-looking and set contemporaneous prices to increase long run profits. In this research, we explore brand competition in an oligopolistic market and find a differential effect of switching cost over brands targeting high- and low-income consumer segments. To summarize, this dissertation investigates consumer behavior and firm pricing strategies from both static and dynamic aspects. The research investigates theoretical implications of economic responses and provides empirical evidence for theoretical hypotheses. From the demand side, the dissertation investigates the effects of cross-shopping, perception of information and brand loyalty on consumer choice. From the supply side, it explores how firms set prices in response to consumer choices and behaviors