Retailer Dynamic Pricing Behavior and the Pass-Through -Their Impacts on Consumer Welfare

In this paper, we examine retailers’ dynamic pricing behavior in a competitive environment, using scanner data on the refrigerated orange juice category. We examine two factors that may result in lower retail prices compared to static optimum prices at categorylevel profit maximization: (i) retailers’ use of a loss leader strategy for national brands to attract more consumers, and (ii) retailers’ desire to maximize store brand sales as well as category-level profit. Moreover, we incorporate two exogenous (unfavorable) cost shock periods, during which the gaps between observed retail prices and static optimum prices increased. Overall, demand volatility and the presence of store brands cause retailers to lower retail prices, thus enhancing consumer welfare. This paper also extends to retailers’ pass-through behavior, using a simulation approach to show that retailers do not pass-through neutrally from manufacturers to consumers, and that pass-through rates vary substantially across brands. The cross passthrough, given brand-specific wholesale price changes, is asymmetric between national brands and store brands. Moreover, the wholesale price increases of store brands make consumers more worse off than the wholesale price increases of national brands. The asymmetry in the cross pass-through implies that retailers’ strategic behavior causes the pass-through to be more complicated than previously believed. This paper suggests that retailers exhibit unique pricing behavior in the presence of store brands as well as demand/cost volatility. To avoid misinterpreting the degree of industry competition, we must fully understand the retailers’ role in pricing. Keyword: Retail Pricing, Price Pass-Through, Store brand, Consumer Welfare ∗ I would like to thank Robert Masson, George Jakubson, Ted O’Donoghue, and Oleg Melnikov for valuable advice and general encouragement. Applied economics workshop participants at Cornell provided many helpful comments. All errors are my own. … Department of Economics, Cornell University, Ithaca, NY14853, [email protected]