Dynamic Pricing and Organic Waste Bans: A Study of Grocery Retailers' Incentives to Reduce Food Waste
52 Pages Posted: 28 Jun 2017 Last revised: 7 Jul 2020
Date Written: May 12, 2020
The perishable grocery industry produces substantial waste. I use an economic model together with sales, perishability, and marginal cost data from a grocery chain’s artisan bread category to evaluate two potential remedies: dynamic pricing and organic waste landfill bans. First, I demonstrate that a store-product’s waste correlates positively with the degree of demand uncertainty and with its profit margin. These patterns are consistent with the classic newsvendor ordering model and suggest that waste is an endogenously determined outcome. Second, I extend the newsvendor model and show that the proposed remedies’ effects are ambiguous. Specifically, (i) dynamic pricing can increase ex ante waste, (ii) waste bans can disincentivize a store from adopting dynamic pricing, and (iii) even when waste bans incentivize its adoption, dynamic pricing can offset some of the waste reduction. Third, I structurally estimate the model on the artisan bread data and use the model to estimate the counterfactual for each remedy. I find that, while the effects vary by store and item, dynamic pricing would reduce total planned waste for the chain by 17.63% and increase gross profits by 3.22%. In comparison, under a fixed pricing policy, a waste ban would result in minimal waste reduction. A ten-fold increase in disposal costs would reduce waste by 4.93%. A waste ban would only marginally increase the return on adopting dynamic pricing, and I cannot rule out a null effect. These results suggest that emissions reductions from waste bans are likely generated by diverting waste away from landfills, rather than reducing waste at the retailer.
(Formerly titled "Reducing Retailer Food Waste through Revenue Management")
Keywords: dynamic pricing, environmental externality, food waste, organic waste ban, mandatory-recycling program
JEL Classification: D61, D62, H21, H23, Q58, D81
Suggested Citation: Suggested Citation