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Repositioning Dynamics and Pricing Strategy

Journal of Marketing Research, 49(6), 2012

57 Pages Posted: 15 Feb 2011 Last revised: 12 Oct 2012

Paul B. Ellickson

University of Rochester - Simon Business School

Sanjog Misra

University of Chicago - Booth School of Business

Harikesh Nair

Stanford University - Graduate School of Business

Date Written: September 10, 2012

Abstract

We measure the revenue and cost implications to supermarkets of changing their price positioning strategy in oligopolistic downstream retail markets. Our estimates have implications for long-run market structure in the supermarket industry, and for measuring the sources of price rigidity in the economy. We exploit a unique dataset containing the price-format decisions of all supermarkets in the U.S. The data contain the format-change decisions of supermarkets in response to a large shock to their local market positions: the entry of Wal-Mart. We exploit the responses of retailers to Wal-Mart entry to infer the cost of changing pricing-formats using a "revealed-preference" argument similar to the spirit of Bresnahan and Reiss (1991). The interaction between retailers and Wal-Mart in each market is modeled as a dynamic game. We find evidence that suggests the entry patterns of Wal-Mart had a significant impact on the costs and incidence of switching pricing strategy. Our results add to the marketing literature on the organization of retail markets, and to a new literature that discusses implications of marketing pricing decisions for macroeconomic studies of price rigidity. More generally, our approach which incorporates long-run dynamic consequences, strategic interaction, and sunk investment costs, outlines how the paradigm of dynamic games may be used to model empirically firms' positioning decisions in Marketing.

Keywords: Retailing, dynamic games, positioning, PROMO, pricing, EDLP, Wal-Mart

Suggested Citation

Ellickson, Paul B. and Misra, Sanjog and Nair, Harikesh, Repositioning Dynamics and Pricing Strategy (September 10, 2012). Journal of Marketing Research, 49(6), 2012. Available at SSRN: https://ssrn.com/abstract=1761599 or http://dx.doi.org/10.2139/ssrn.1761599

Paul B. Ellickson

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Sanjog Misra

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Harikesh Nair (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-4256 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/nair/index.html

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