In-Store Experiments to Determine the Impact of Price on Sales∗

This paper describes an experimentation methodology to measure how demand varies with price and the results of its application at a toy retailer. The same product is assigned different price-points in different store panels and the resulting sales are used to estimate a demand curve. We use a variant of the k-median problem to form store panels that control for differences between stores and produce results that are representative of the entire chain. We use the estimated demand curve to find a price that maximizes profit. Our experiment yielded the unexpected result that demand increases with price in some cases. We present likely reasons for this finding from our discussions with retail managers. Our methodology can be used to analyze the effect of several marketing and promotional levers employed in a retail store besides pricing. ∗This paper is based on a pricing experiment conducted at Zany Brainy, Inc., a toys retailer based in King of Prussia, Pa., and owned by F.A.O. We would like to thank Gene Rosadino for facilitating the experiment, and Young-Hoon Park (Cornell University) and Robert Shoemaker (New York University) for helpful comments. †Department of Information, Operations and Management Science, Leonard N. Stern School of Business, New York University, 8-160, 44 West 4th St., New York, NY 10012. E-mail: [email protected]. ‡The Wharton School, University of Pennsylvania, Jon M. Huntsman Hall, 3730 Walnut St., Philadelphia, PA 19104-6366. E-mail: [email protected].