Academic journal article International Journal of Business

Short- and Long-Run Competition of Retailer Pricing Strategies

Academic journal article International Journal of Business

Short- and Long-Run Competition of Retailer Pricing Strategies

Article excerpt

ABSTRACT

Retailers' pricing strategies are one of the most important determinants of the retail dynamics and the competitive structure of the retail market. Retailers use both short-term and long-term pricing strategies to optimize their market share. This study addresses several critical questions: (1) To what extent do retailers react to competitive price specials? (2) Do retailers alternate price specials of competing brands? and, (3) Can one identify stores or brands, that are price leaders or do retailers/brands set prices independently? We use cointegration analysis to estimate a model which allows us to study both the short- and the long-run dynamics of competitive prices within a single framework.

JEL Classifications: M31, D4

Keywords: price strategies; cointegration analysis

I. INTRODUCTION

It is well known that the location decision exerts a strong impact on the success or failure of a retailer. The location decision vis-a-vis the size and composition of the catchment area describes the maximum sales level that can be reached. Once the locational decision has been made, retailers have limited control over this decision variable. To increase store traffic, they necessarily have to rely on pricing, service and product variety. The pricing variable, in particular, constitutes an important tool for retailers.

Price is the dominant competitive tool in many local retail outlets (Coughlan and Mantrala 1994; Hamilton and Chernev 2013). The pricing decision is one of the most important and difficult decisions that a retailer makes. In the short run and long run, retailers need to consider competitive pricing strategies and anticipate competitor's reactions. These decisions consist of short-run tactical decisions, e.g., temporary price cuts, and longer-run strategic decisions determining price levels.

While a significant amount of research has examined the short-run dynamics of pricing strategies (Blattberg et al., 1995; Empen et al., 2015), long-run retailer pricing strategies have received less attention. The current paper is an empirical analysis of the short- and the long-run dynamics of competitive retailer pricing strategies.

In the long run, we study equilibrium relationships between prices while in the short-run the emphasis is on the competitive dynamics to temporary price change. That is, we will identify which brands compete with each other in the long-run and the short-run. Long-run pricing strategies are investigated by determining the existence of equilibrium relationships between competitive prices. Prices are in long-run equilibrium if there is no inherent tendency for any of the price series to change--while prices may be non-stationary and in short-run disequilibrium there are no persistent trends between prices in the long run. In equilibrium, retailers may be competing at different price levels. In the short run, we focus on how retailers respond to competitive pricing strategies. This study addresses several critical questions: (1) To what extent do retailers react to competitive price specials? (2) Do retailers alternate price specials of competing brands? and (3) Can one identify stores or brands, that are price leaders or do retailers/brands set prices independently?

We use cointegration analysis, a time-series method, to estimate a model which allows us to study both the short- and the long- run dynamics of competitive prices within a single framework. The paper is organized as follows. First, we will discuss the principles of cointegration analysis. This is followed by a description of the data. Next, the results of the analysis will be discussed. We will complete the paper by drawing some conclusions.

II. METHODOLOGY

The empirical approach used in this paper follows the framework by Powers et al. (1991). The first step is to test for non-stationarity of the data. If all price series are stationary, prices are in long-run equilibrium and simple linear regression can be used to analyze the short-run dynamics. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.