An Empirical Investigation Of Price Rigidity In The Grocery Retail Sector

Flexibility in prices is generally assumed to be a key factor in gaining competitive advantage in sectors like the supermarket grocery stores. However, changing prices frequently is a costly exercise for retailers. The degree of price rigidity is therefore determined by this need to respond to changing market conditions as well as the inherent costs of changing prices. This tension makes the degree of price rigidity of great empirical importance to marketers and economists. To this end, this thesis empirically explores price rigidity in the supermarket grocery sector. It investigates price rigidity using observational price data over a period of 52 weeks, across 11 categories including almost one hundred SKUs, and from three different stores in a Montreal area. Price rigidity is estimated both in temporary (sales price) as well as more permanent price changes (regular price). It also investigates asymmetries in price rigidities. The general results show a surprisingly high degree of price rigidity with a higher rigidity in permanent price changes being complemented by a compensatory flexibility in sales prices. Prices remain unchanged for more than 9 weeks on the average for sales price, and more than 14 weeks on average for regular prices. We also find some evidence of asymmetric price rigidity, although limited and not statistically significant within the constraint of the limited dataset. The patterns suggest that both store and category level factors could be important sources of variation of price rigidity. This calls for more research into their respective roles.