An Empirical Study of National vs. Local Pricing by Chain Stores under Competition

Abstract

Geographic price discrimination is generally considered beneficial to firm profitability. However, theoretical results point to conditions under which firms might prefer to price uniformly across markets in oligopolistic settings. This paper provides an empirical analysis of competitive price discrimination and quantitatively assesses the profitability of national pricing relative to store-level pricing policies under different market conditions. Specifically, we construct and estimate a model of retail competition using extensive data from the digital camera market. A series of counterfactuals show that, under reasonable commitment mechanisms, two leading chains would benefit from employing national pricing policies, 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.

Keywords: Pricing, Retailing, Competitive Strategy, Geographic Price Targeting, National Pricing Policy, Local Pricing Policy, Hybrid Pricing Policy.

JEL Classification: M30, M31