Time-based Pricing at Grocery Stores? Equilibrium Transition under Retail Competition and Negative Congestion Externality

Abstract

With the emergence of technologies such as electronic shelf labels, some grocery retailers had begun to trial intra-day time-based pricing where they charge higher prices during congested peak hours. Such industry trend along with the influence of pandemic has motivated us to examine whether, and if so how, retailers selling essential items would transition to time-based pricing. We present a model of a two-stage dynamic game between two retailers that competes for congestion averse consumers. The retailers first announce one of three transition strategies--``no transition,'' ``immediate,'' and ``cautious,'' and then subsequently engage in (differentiated) price competition over two time periods (or stages). The consumers ``endogenously'' determine when and where to shop in each stage by taking the prices and the (equilibrium) congestion levels into consideration. Our analysis of the subgame perfect equilibrium reveals that all retailers will eventually transition to time-based pricing. Specifically, depending on the consumers' level of congestion aversion and retailers' myopia, retailers can both transition ``immediately,'' both ``cautiously'', or one transitions ``immediately" while the other ``cautiously.'' In all scenarios, demand smoothing is achieved ensuring safer and more pleasant shopping environment for the consumers. However, consumer welfare can suffer due to the increase in prices. In fact, when consumers' congestion aversion level is high, the equilibrium differentiated prices for both normal period and peak period can be higher than the current equilibrium uniform prices. We extend our analysis to examine the impact of retailer's commitment to stable pricing, and find that the level of commitment has a non-monotonic impact on consumer welfare.

Keywords: Time-based pricing, demand smoothing, duopoly, customer negative externality