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An Empirical Study of National vs. Local Pricing under Multimarket Competition

55 Pages Posted: 15 Feb 2017  

Yang Li

Cheung Kong Graduate School of Business

Brett R. Gordon

Northwestern University - Kellogg School of Management

Oded Netzer

Columbia Business School - Marketing

Date Written: January 2017

Abstract

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

Li, Yang and Gordon, Brett R. and Netzer, Oded, An Empirical Study of National vs. Local Pricing under Multimarket Competition (January 2017). Columbia Business School Research Paper No. 17-25. Available at SSRN: https://ssrn.com/abstract=2916519 or http://dx.doi.org/10.2139/ssrn.2916519

Yang Li (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E2
One East Chang An Avenue
Beijing, Beijing 100738
China
+861085188858 (Phone)

HOME PAGE: http://english.ckgsb.edu.cn/?q=node/381

Brett R. Gordon

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Oded Netzer

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

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