Investigating Category Pricing Behavior at a Retail Chain

In studying retailer pricing behavior, researchers typically assume that retailers maximize profits across all brands in a focal product category. In this article, the author attempts to study empirically the extent to which three factors affect retail prices: (1) the effects of payments from manufacturers to the retailer other than regular promotions, as well as the effects of additional costs borne by the retailer for these brands; (2) the retailer’s objectives specific to its store brand, such as maximizing store brand share; and (3) the effects of retail competition and store traffic. By specifying a demand function at the brand-chain level for each brand in the product category, the author derives pricing rules for the retailer. The author decomposes the retail price of a brand into effects due to wholesale price, markup (obtained from the demand functions), additional promotional payments, retail competition, and the retailer’s objectives for the store brand. The author carries out empirical analysis for a specific product category at a single retail grocery chain. The results indicate that the effects of the three factors vary across brands in the category.