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A Theory for Pricing Nonfeatured Products in Supermarkets

1980; University of Chicago Press; Volume: 53; Issue: S3 Linguagem: Inglês

10.1086/296112

1537-5374

John D. C. Little, Jeremy F. Shapiro,

Consumer Retail Behavior Studies

Of the 6000 products in the average supermarket, a few receive special displays, advertising, and prices in a given week, but the great majority are assigned prices by simple percentage markups within category, adjusted, if necessary, for competitive conditions and special price endings.Missing is any direct consideration of actual customer price response.The advent of the Universal Product Code and inexpensive, machine readable sales data by individual item promises to make possible the widespread determination of customer price response by in-store experiment.This in turn, opens up the possiblity of developing and implementing a more adequate theory for setting prices.Yet, stores should not set price in a simple profit-maximizing way based on in-store measurements of price response.The reason is that the customer may pay a high price once and then not come back to the store, thereby creating a small short term gain and a large long term loss.A two-stage theory addresses this issue by postulating that customers once in the store purchase goods to maximize their utility.This determines observable in-store customer price response.The store then maximizes its profit subject to a constraint on customer utility delivered.The level of the constraint becomes a policy parameter that determines, in part, the attractiveness of the store to the customer.It is shown that under this theory, the store can set prices of nonfeatured items using a formula containing only empirical measurements and a single policy parameter for all items.It is further shown that the prices are efficient in the sense that for a given level of store profit no other set of prices will permit higher consumer utility and, conversely, for a given level of customer utility, no other prices will permit higher store profit.