Paul B. Ellickson

Supermarket Pricing Strategies

Most supermarket firms choose to position themselves by offering either everyday low prices (EDLP) across several items or offering temporary price reductions (promotions) on a limited range of items. While this choice has been addressed from a theoretical perspective in both the marketing and economic literature, relatively little is known about how these decisions are made in practice, especially within a competitive environment. This paper exploits a unique store level data set consisting of every supermarket operating in the United States in 1998. For each of these stores, we observe the pricing strategy the firm has chosen to follow, as reported by the firm itself. Using a system of simultaneous discrete choice models, we estimate each stores choice of pricing strategy as a static discrete game of incomplete information. In contrast to the predictions of the theoretical literature, we find strong evidence that firms cluster by strategy by choosing actions that agree with those of its rivals. We also find a significant impact of various demographic and store/chain characteristics, providing some qualified support for several specific predictions from marketing theory.

Supermarkets as a Natural Oligopoly

This paper uses a model of endogenous sunk cost (ESC) competition to explain the industrial structure of the supermarket industry, where a few powerful chains provide high quality products at low prices. The predictions of this model accord well with the features of the supermarket industry documented here. Using a novel dataset of store level observations, I demonstrate that 1) the same number of high quality firms enter markets of varying sizes and compete side by side for the same consumers and 2) quality increases with the size of the market. In addition to documenting a local structure of competition consistent with the ESC framework, I demonstrate that the choice of quality by rival firms behaves as a strategic complement. This key finding, which is consistent with an ESC model of quality enhancing sunk outlays, eliminates several alternative explanations of concentration in the supermarket industry, including most standard models of cost-reducing investment and product proliferation. These results suggest that the competitive mechanisms sustaining high levels of concentration in the supermarket industry are inherently rivalrous and unlikely to lead to the emergence of a single dominant firm.

Wal-Mart and the Geography of Grocery Retailing

This paper empirically examines the impact of entry by Wal-Mart on competition in the supermarket industry. Using a detailed panel dataset spanning 1994 to 2006, we estimate the impact of Wal-Mart on three key outcome variables (revenue, employment, and store size), controlling for persistent local trends and systematic dierences across markets by exploiting the detailed spatial structure of our store-level census. We nd that Wal-Mart’s impact is highly localized, aecting rms only within a tight, three-mile radius of its location. Within this radius, the bulk of the impact falls on declining rms { entry and expansion by growing rms are essentially unaected. Moreover, the stores most damaged by Wal-Mart’s entry are the outlets of larger chains. This suggests that Wal-Mart’s expansion into groceries is quite distinct from its earlier experience in the discount industry, where the primary casualties were single outlet rms and sole proprietorships. This contrast sheds light on the role density economies play in shaping both equilibrium market structure and economic geography. In the case of grocery competition, high travel costs and the perishable nature of groceries appear to impart horizontal dierentiation betweenThis paper empirically examines the impact of entry by Wal-Mart on competition in the supermarket industry. Using a detailed panel dataset spanning 1994–2006, we estimate the impact of Wal-Mart on firm outcomes and market structure, controlling for persistent local trends and systematic differences across markets by exploiting the detailed spatial structure of our store-level census. We find that Wal-Mart’s impact is highly localized, affecting firms only within a tight, two-mile radius of its location. Within this radius, the bulk of the impact falls on declining firms and mostly on the intensive margin. Entry of new firms is essentially unaffected. Moreover, the stores most damaged by Wal-Mart’s entry are the outlets of larger chains. This suggests that Wal-Mart’s expansion into groceries is quite distinct from its earlier experience in the discount industry, where the primary casualties were small chains and sole proprietorships that were forced to exit the market. This contrast sheds light on the role density economies play in shaping both equilibrium market structure and economic geography. In the case of grocery competition, high travel costs and the perishable nature of groceries appear to impart horizontal differentiation between firms. This differentiation in demand appears to reduce impact of scale economies advantages that Wal-Mart exploited to the detriment of far-flung competitors in the discount store industry.

Structural Workshop Paper---Estimating Discrete Games

This paper provides a critical review of the methods for estimating static discrete games and their relevance for quantitative marketing. We discuss the various modeling approaches, alternative assumptions, and relevant trade-offs involved in taking these empirical methods to data. We consider games of both complete and incomplete information, examine the primary methods for dealing with the coherency problems introduced by multiplicity of equilibria, and provide concrete examples from the literature. We illustrate the mechanics of estimation using a real-world example and provide the computer code and data set with which to replicate our results.

Market Structure and Performance

What determines structure and profitability across markets for goods and services? Understanding the relationship between market structure and performance is critical for determining effective economic policy governing anti-trust, intellectual property, industry regulation, and international trade. Economists have analyzed these issues for many decades. An initial descriptive literature has given way to a more formalized game-theoretic approach. One stream of literature paints on a large canvas, identifying strong mechanisms that can hold across the broad run of industries. The other focuses on specific industries, building detailed models tailored to key institutional details. Both have yielded important insights and raised additional questions and directions for future research. Recent work promises to unite both streams under a common methodological framework.

The Competitive Effects of Entry: Evidence from Supercenter Expansion

Coupling weekly grocery transaction records with the exact location and opening date of entering Walmarts over an eleven year period, we examine how Supercenter entry affects prices and revenues at incumbent supermarkets. We find that entry within one mile of an incumbent causes a sharp 16% drop in revenue, an effect that decays quickly with distance. Surprisingly, despite large cross store differences in prices of supermarkets by exposure to Walmart, our findings also indicate that Supercenter entry has no causal effect on incumbent prices. This lack of a price response is robust across many dimensions, including a lack of response for individual categories and brands within a category.

Product Launches with New Attributes: A Hybrid Conjoint-Consumer Panel Technique for Estimating Demand

We propose and empirically evaluate a new hybrid estimation approach that integrates choice-based conjoint with repeated purchase data for a dense consumer panel, and show that it increases the accuracy of conjoint predictions for actual purchases observed months later. Our key innovation lies in combining conjoint data with a long and detailed panel of actual choices, both before and after the product line introduction, for both survey respondents and a random sample of the target population. By linking the actual purchase and conjoint data, we can estimate preferences for attributes not yet present in the marketplace, while also addressing many of the key limitations of conjoint analysis, including sample selection and contextual differences. A counterfactual product and pricing exercise illustrates its managerial relevance.

Measuring Competition in Spatial Retail

We propose a framework for analyzing spatial competition between retailers of different formats. Our approach yields localized measures of concentration and store-level diversion ratios that can be used to prospectively evaluate mergers in highly differentiated retail markets. Our method does not require the analyst to define markets ex ante, collect prices or construct ad hoc price indices. Using data from the supermarket industry, we evaluate two representative mergers. Contrary to conventional wisdom, we find substantial cross-format competition between supercenters, club stores, and traditional grocers. Our analysis cautions against ignoring the impact of new formats when evaluating mergers between traditional grocers.