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Dissertation/Thesis Abstract

An empirical analysis of retail pricing strategies from an operations perspective
by Jung, Ilyoung, Ph.D., State University of New York at Buffalo, 2014, 171; 3640790
Abstract (Summary)

The dissertation consists of three essays. The first essay examines the relationship between promotional prices and retail sales with the EDLP and Hi-Lo pricing strategies. The objective is to investigate the short or long term effect of promotion on sales that varies across product categories with two types of retail pricing strategies and to provide the understanding of inter-relationship. Such an understanding will assist the manufacturer in better coordinating its pricing and promotion decisions for its product categories. In this essay, I apply the time-series approaches to achieve the goal. Thus, I organize the first essay as follows. First, the Box-Jenkins approach, unit root and co-integration tests are used to verify stationarity versus non-stationarity of each of the time series variables involved. Second, the dynamic interaction between promotional price and retail sales is estimated based on the vector autoregressive (VAR) model. Finally, the estimated coefficients are used to simulate the over-time impact of a promotion on sales, known as the "impulse response function". The empirical analysis is based on the Information Resources, Inc. data which composed of numerous product-store combinations from 10 categories of consumer packaged goods in 47 U.S. markets over a seven-year weekly time period from 2001 to 2007. Empirical findings of this study indicate that the promotion of perishable product categories shows strong immediate effects of their price promotions but no permanent effects. In addition, Hi-Lo store's promotions are more effective than EDLP stores based on the deal spike in impulse response functions. Most of storable products are positive purchase reinforcement that adds to positive immediate effects and results in a large cumulative effect, excluding household cleaner. In the complement product categories, the coffee and sugar substitute are sales revert back to baseline and there is no permanent impact of the price. However, when carefully considering the complement products, this study find that the promotional coffee price shocks lead to long-term increase of sugar substitute sales.

The second essay identifies the elements of pricing decisions with store level data under different pricing strategies. The effective implementation of dynamic pricing or revenue management schemes has been discussed in the operations research field. However, the researches only focus on the single product level analysis, rather than looking with a strategic view of the store or chain level. Furthermore, most researches are based on optimization or simulation techniques without empirical findings from the retail industries dataset. Therefore, this essay characterizes retailers' pricing decisions such as market type, store size, product assortment, competitor's price level and deal frequency along with pricing strategies through the probit and heteroskedastic probit analysis methods. The empirical results suggest that the population and market interaction term as the market factors appear to play significant roles in the pricing strategies. In the operational factors, store size, product assortment, and interaction term play a key role in EDLP pricing retailers. In the competitors' factors, the Hi-Lo strategy is preferred over the EDLP strategy when the competitor offers the promotional deals with high frequency.

The third essay performs to measure and compare the efficiency of both pricing strategies of retail chains according to different types of competition. To reflect retail chain's characteristics, this study suggests the speed of price adjustment approach to measure the efficiency of retail chains that have different pricing strategies and different types of market competition. The dataset yields a panel dataset, which has both cross-sectional and longitudinal property, consisting of 5,814 observations with 308 weekly time points and 19 regional markets. The empirical analysis by the nonlinear SUR estimation fitted into the panel dataset lead to several findings. The estimated speed of price adjustment in the local market reflects well the efficiency of a Hi-Lo pricing according to different types of market competition. In the highly competitive market, the Hi-Lo chains show higher speed of price adjustment whereas slower speed in less concentrated market. Especially, the Hi-Lo chains with position of market leader competing with the EDLP followers shows the speed of price adjustment is getting slow than other markets. When Hi-Lo chains compete with each other in the same market, they offer the price discount more aggressively and adjust the price rapidly as a means to maintain their market position. (Abstract shortened by UMI.)

Indexing (document details)
Advisor: Lin, Winston T.
Commitee: Suresh, Nallan C., Wang, Charles X.
School: State University of New York at Buffalo
Department: Operations Management and Strategy
School Location: United States -- New York
Source: DAI-B 76/02(E), Dissertation Abstracts International
Subjects: Operations research
Keywords: Competition, Pricing strategy, Promotions, Retail
Publication Number: 3640790
ISBN: 978-1-321-26334-3
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