Retail pricing decisions and product category competitive structure

a r t i c l e i n f o Keywords: Retail pricing decision model Demand forecasting Market share models Category management Competitive structure Store-level scanner data This study addresses the use of demand forecasting techniques by retailers to support their decision making. Specifically, the authors propose a pricing decision support model for retailers to estimate optimal prices, whose output depends on the configuration of a supporting measurement model. The measurement model is a demand function that relates sales and prices within the category; optimal prices are those whose effects on demand and retail margins maximize the category's profitability. This investigation focuses particularly on the role of competitive structure, such that the authors consider two types of price competition asymmetries for demand forecasting: those depending on the brand (differential price effects) and those dealing with demand for competing brands (cross-price effects). By explicitly modeling competitive asymmetries in the demand function that underlies the decision support model, the authors assess implications for pricing decisions, sales, and profitability. The empirical application of the model to store-level, aggregated scanner data for two frequently purchased categories reveals the impact of an asymmetric competitive structure on demand forecasting and optimal pricing decisions. Furthermore, this article quantifies the costs of ignoring asymmetric competitive interactions in retailers' decision making. The increasing power of retailers has become more apparent in the form of greater autonomy in their final pricing decisions. These autonomous retailer pricing decisions constitute a key element of marketing channel performance that can determine the profits of manufacturers [18], especially if the decisions come from large-scale retailers [20]. Therefore, it should come as no surprise that retailing research has focused primarily on category management and the favorable consequences of this management strategy compared with brand-centered management [45]. Authors cite the key role of category management in achieving more profitable retail pricing structures [3], yet no studies investigate the extent to which these positive consequences might depend on the implementation of the category management. Despite the importance of assessing and understanding the competitive structure of product categories for successful category management, prior research offers little empirical support. This article addresses this gap by analyzing how a greater understanding of the competitive structure within a product category may improve retail pricing decisions in the context of category management approaches. A full understanding of any competitive structure requires the analysis of competition asymmetries [8]; we consider the role …