LINTHICUM, MD, February 25 - Cost-conscious shoppers can get more for their money by carefully planning when to buy at their local supermarkets and when to shop at everyday low-price outlets, according to a paper in a journal published by the Institute for Operations Research and the Management Sciences (INFORMS®).
The study, "Rational Shopping Behavior and the Option Value of Variable Pricing" is by Teck-Hua Ho, the Wharton School, University of Pennsylvania, Christopher S. Tang, The Anderson School, UCLA, and David R. Bell, the Wharton School, University of Pennsylvania. It appears in the current issue of Management Science, an INFORMS publication. The authors used math modeling and the principles of operations research/management science to reach their conclusions. A simple strategy, the authors say, is to shop more often and purchase a fewer number of items at local supermarkets that offer price promotions. At these stores, the prices fluctuate a great deal and prices tend to be high on average. Larger shopping outings should be limited to stores that feature everyday low prices.
The authors' normative analysis includes one unexpected conclusion: Shoppers should consume larger amounts of items they have bought on sale at local stores to be better off in the long run.
Questions for Shoppers
The authors proposed a series of questions for shoppers:
- When a product's price fluctuates at a store, how should rational, cost-sensitive shoppers shop for it?
- How frequently should shoppers visit the store, and how much of the product should they buy when they get there?
- Would the rational shopping behavior differ across Every Day Low Price (EDLP) and Promotional Pricing (HILO) stores?
- Which retail price format is better for consumers, Every Day Low Price or Promotional Pricing?
Retailers Have Toss-Up on Pricing Format
The authors' results have implications for retailers as well. The authors show
that the HILO pricing format is more effective in enticing shoppers to make more
frequent trips to the store. Since, however, the HILO pricing format provides
more flexibility for shoppers to buy more when the price is low and buy less
when the price is high, the revenues from the product category under
consideration will be lower to the store per unit time.
An additional benefit for owners of HILO stores is that sales pricing may increase the consumption rate of a product category, which leads to a corresponding increase in store revenue.
There is no dominant pricing format, they conclude. The HILO pricing format increases shopping frequency but generates lower revenue per product category. The EDLP pricing format decreases shopping frequency but generates higher revenue from the product category under consideration. This may explain why both pricing formats coexist in practice.
Data
The authors used store multicategory scanner panel data drawn from a single IRI
(Information Resources, Inc.) Market in the Chicago area. The database contains
purchasing information for 33 product categories (9 non-food and 24 food
products) over a two-year period (June, 1991 - June, 1993), covering a total of
66,694 shopping visits taken by 513 households. The IRI market includes three
stores that are located within a radius of three miles in the same neighborhood.
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 12,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications.
Journal
Management Science