Investigating Category Pricing Behavior at a Retail Chain

PRADEEP K. CHINTAGUNTA*
In studying retailer pricing behavior, researchers typically assume that retailers maximize profits across all brands in a focal product category. In this article, the author attempts to study empirically the extent to which three factors affect retail prices: (1) the effects of payments from manufacturers to the retailer other than regular promotions, as well as the effects of additional costs borne by the retailer for these brands; (2) the retailer’s objectives specific to its store brand, such as maximizing store brand share; and (3) the effects of retail competition and store traffic. By specifying a demand function at the brand-chain level for each brand in the product category, the author derives pricing rules for the retailer. The author decomposes the retail price of a brand into effects due to wholesale price, markup (obtained from the demand functions), additional promotional payments, retail competition, and the retailer’s objectives for the store brand. The author carries out empirical analysis for a specific product category at a single retail grocery chain. The results indicate that the effects of the three factors vary across brands in the category.

Investigating Category Pricing Behavior at a Retail Chain
Studying retailer pricing behavior is an issue that has generated a great deal of interest in the marketing literature. Researchers have examined the issue from both theoretical (e.g., Choi 1991; Raju, Sethuraman, and Dhar 1995) and empirical (e.g., Tellis and Zufryden 1995) perspectives. Most studies assume that retailers set prices for different brands in a product category to maximize total category profits (see, e.g., Raju, Sethuraman, and Dhar 1995; Tellis and Zufryden 1995; Vilcassim and Chintagunta 1995). Although some recent studies have advocated examining profits across categories, the idea of maximizing profits at the category level appears to be the basis of most studies on retail pricing behavior. This

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