Price fixing

A recent posting on The Economist’s Babbage blog alerted me to the existence of websites which don’t just do simple price comparisons, they predict whether prices will rise or fall (especially useful for those booking fast-changing airline tickets on-lin) & also for the latest must-have technological gadgets, toys & gizmos. The developers of the website have developed their own pricing models for these

Which set me thinking again – exactly how do supermarkets set their prices?

We [think we] know some of the general principles – intense competition, the desire to keep prices low & certainly no higher than those the customer can find elsewhere; prices the same whichever branch you visit; squeezing suppliers (especially farmers & growers).

My own day to day experience suggests that despite all this intensity of competition (& the abolition of retail price maintenance) the prices of nationally branded goods vary little between supermarkets. Variations in demand (reflecting the make up of the local customer base) are more likely to be catered for through the sizes on offer, or by a restricted offering of only the more popular varieties from the full range of, for example, canned soup.

Own brands tend to show much greater variation in price, though a lot of homework, close reading of labels, or taste testing, is required to find out how these reflect differences in quality; in the period, for example, when I was eating a lot of ready meals & also, for different reasons, keeping a data base of the nutritional analysis & contents, there were surprisingly frequent changes to the recipes for something like spaghetti carbonara, across all stores.

And then of course there are all the other factors such as weather, overall marketing strategies & campaigns, loyalty cards, standards of service …

But none of this comes close to answering the question of how prices are set. Is there some gigantic model which decides this centrally for each supermarket group? Are decisions devolved to individual section managers? If so, what sort of parameters or algorithms do they work to? Is there a list of price points to adhere to? Are the tests daily, monthly or weekly financial targets (profit, sales, margins). Or something I haven’t thought of?

Have any academic economists done empirical research on this? Even if firms would be reluctant to share data with researchers, & hence with their competitors, there is now a wide, general availability of rich price data for empirical investigation, at least for online shopping.

Especially on price points

Links
And now, the gadget forecast

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Price psychology

Hole numbers

Cui bono