An Empirical Study of National vs. Local Pricing under Multimarket Competition
55 Pages Posted: 15 Feb 2017
Date Written: January 2017
Geographic price discrimination is generally considered beneficial to firm profitability. Firms can extract higher rents by varying prices across markets to match consumers' preferences. This paper empirically demonstrates, however, that a firm may prefer to forego the flexibility to customize prices and instead employ a national pricing policy that fixes prices across markets. For retailers that operate in multiple geographic markets with varying degrees of competitive intensity, a national pricing policy helps avoid intense local competition due to targeted prices. We examine how competitive forces shape a firm's choice of national versus local pricing in a model of multimarket retail competition. Using extensive data from the digital camera market, a series of counterfactual analyses show that two leading chains should employ a national pricing policy to maximize profits, whereas the discount retailer should target prices in each local market. Additional results explore the boundary conditions of these findings and evaluate hybrid pricing policies, which could assist retail managers' choice of geographic pricing policies.
Keywords: Pricing, Retailing, Competitive Strategy, Geographic Price Targeting, National Pricing Policy, Local Pricing Policy
JEL Classification: M30, M31
Suggested Citation: Suggested Citation