An Investigation of Asymmetric Pricing “In the Small” in the Retail Grocery Sector

Abstract

This dissertation studies asymmetric pricing in the small (APIS), where small price increases outnumber small price decreases, the asymmetry disappearing for larger price changes; and the corresponding reversed phenomenon (APIS-R). Current evidence suggests retailers deploy these pricing practices despite menu costs and potential consumer concerns. There is also evidence that inflation is only a partial contributor to the phenomena. These point to possible strategic intent driving these retail pricing practices. However, there are only a few papers in the domain, and none specifically address the cross-sectional and longitudinal variations. Further, existing results are mostly based on a single retailer, limited products, short time span, and legacy datasets dating back to the 1980s and 1990s, leaving their current relevance unsettled. Recent papers also question if small price changes are measurement artifacts. This dissertation addresses these gaps by analyzing several large contemporary datasets – a scanner dataset with more than 79 billion price observations and a matching consumer panel dataset with more than 50,000 participating panelists. Our key results imply the pricing practices can be retailers’ strategic responses to the cognitive tasks faced by consumers. Chapter 1 is a general introduction to the thesis. Chapter 2 sets up the fundamentals of the phenomena and reports robust evidence of APIS and APIS-R across the retail price spectrum. Chapter 3 examines the cross-sectional variations of the phenomena and finds that APIS and APIS-R are associated with product characteristics such as purchase frequency and category price level, as well as retail format such as HILO or EDLP. Chapter 4 explores the longitudinal variations and finds that business cycles are a major time-varying factor influencing retail practices of APIS and APIS-R. Chapter 5 concludes with reflections on the findings, implications for theory and practice, limitations, and suggestions for future studies.