The Impact of Price Advertising on Store Choice and Retail Competition

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This dissertation analyzes the role of price advertising in the retail grocery setting, first exploring how consumers use price advertising in their shopping location decisions, and then considering ways in which retailers use price advertising to maximize store traffic and profits, given consumer use of information. Chapter 2 provides a survey of price advertising, and in particular of retailer weekly flyers, or circulars. I examine the retailer's decision process, from the outcomes targeted by retailers to the tactics used to achieve these outcomes. The empirical literature shows that price advertising can affect outcomes such as current period sales, store traffic, and price image. Difficulties relating to data and identification make evaluation of specific tactics difficult, but the theoretical literature has formalized and explored several tactics including deep discounting and maximization of favorable price comparisons. Chapter 3 addresses the impact of price advertising on household shopping location choice. I identify household attributes that I expect to result in greater sensitivity to orange juice price advertising---annual orange juice purchase volume and brand share of household purchases---and find that annual purchase volume is associated with a greater tendency to visit advertising chains. This provides evidence that week-to-week price advertising measurably changes household shopping location choice. This effect is, however, concentrated on households with high (top 10 percentile) annual orange juice purchases. I find that other households are less likely to choose chains that advertise orange juice. Chapter 4 discusses two alternative price advertising models that lead to opposite predictions regarding strategic complementarity/substitutability (i.e. whether marginal profits from advertising increase/decrease when competitors advertise). To test these predictions, I estimate a complete information game on a sample of four years of orange juice advertising in three major cities. I find that advertising a major brand of orange juice is a strategic substitute, a finding consistent with models in which advertising different products reduces competitive pricing pressure.

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  • 10/01/2018
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