Retail Pricing the Economic Research Institute at the Stockholm School of Economics Sveavaqen 65, Stockholm

Retail Pricing The Economic Research Institute at the Stockholm School of Economics Sveavaqen 65, Stockholm Basic Orientation The Economic Research Institute (EFI), at the Stockholm School of Economics is devoted to the scientific study of problems in management science and economics. It provides research facilities for scholars belonging to these disciplines, training advanced students in scientific research. The studies to be carried out by the Institute are chosen on the basis of their expected scientific value and their relevance to the research programs outlined by the different sections of the Institute. The work of the Inst'itute is thus in no way influenced by any political or economic interest group. Board of the Institute: Sven-Erik Johansson, Professor of Business Administration (Chairman); Erik Dahmen, Professor of Economics; Paulsson Frenckner, Professor of Business Administration; Folke Kristensson, Professor of Business Administration; Assar Lindbeck, Professor of Economics; Dan Lundberg, F. K.; Erik Lundberg, Professor of Economics; Harriet Lundh, Mrs; Erik Ruist, Professor of Economic Statistics, Thomas Thorburn, Professor of Business Administration; Gunnar Westerlund, Professor of Social Psychology; Karl-Erik Warneryd, Professor of Economic Psychology; Marlene Olander, Mrs; Knut Rodhe, Professor of Law (associate member); Staffan Persson, Professor (Iaborator) of Business Admlnlstratlon (associate member). Director of the Institute: Professor K.-E. Warneryd Research Divisions: Program Director: A Management and Personnel Professor G. Westerlund Administration B Finance and Accounting Professor S.-E. Johansson C Managerial Economics Professor P. Frenckner o Marketing Management-Strategy and Professor F. Kristensson Economic Structure F Public Administration Professor T. Thorburn P Economic Psychology-Social and Professor K.-E. Warneryd Individual Behavior S Macro Economics Professor A. Lindbeck Retail Pricing An Integrated Economic and Psychological Approach By Harry Nystrom EFI The Economic Research Institute at the Stockholm School of Economics Stockholm 1970 © EFI UDK 338.5: 658.87 658.8.012.12 Omslag av Gudmund Nystrom Kungl. Boktryckeriet PA Norstedt & Saner Stockholm 1970 Preface This report, carried out at the Economic Research Institute will shortly be submitted as a doctor's thesis at the Stockholm School of Economics. The author has been entirely free to conduct his research in his own ways as an expression of his own ideas. The study covers areas within marketing, psychology and the micro theory of economics. According to our tradition this integrated approach is a contribution per se, and the study should not be looked upon as contributions in each of the individual areas. The Institute is grateful for the financial support of this research - mainly from the Swedish Council for Social Science Research and the Svenska Handelsbanken's Foundation for Social Research. Stockholm, February 1970. THE ECONOMIC RESEARCH INSTITUTE at The Stockholm School of Economics Karl-Erik Warneryd Folke Kristensson Director of the Institute Program Director Marketing Management-Strategy and Economic Structure Acknowledgements The present study, since it cuts across traditional boundaries of re search, has benefited greatly from the stimulating multi-disciplinary atmosphere provided by the Stockholm School of Economics and its Economic Research Institute. I am, therefore, indebted to a large number of persons both within and outside the Institute. To begin with I would like to thank Professor Folke Kristensson, head of the research section in which the study has been carried out. Professor Kristensson originally suggested the area of investigation in 1962, and has followed and inspired my work ever since. I am very grateful for his constructive criticism and support. I would also like to thank all former and present colleagues in the research section for Marketing Management-Strategy and Economic Structure for valuable criticism and suggestions at our group semi nars. Various preliminary chapters have been read and commented on by Professors Paulsson Frenckner, Erik Ruist, Karl-Erik Wameryd and Docent Lars-Gunnar Mattsson. I have also benefited from discussions with among others Messrs. Goran Ahlberg, Torsten Ahle, Gustaf von Essen, Ingolf StAhl and Folke Olander. I have had the opportunity of discussing my ideas at a number of seminars at the school of Economics which has greatly influenced my thinking. Seminars in Economic Psychology have been led by Professor Wameryd; a seminar in Economics was led by Professor Assar Lindbeck. At the Joint Faculty seminar at Aspenas and the Scandinavian Fa culty Meeting in Gothenburg, both in August 1969, I had the privi lege of presenting a shorter version of some of the main ideas of the present study. I would like to thank all the participants for their helpful criticism, particularly Professors Richard M. Cyert, John U. Farley and Gosta Mickwitz. 6 lowe a special debt of gratitude to Mr. Staffan Danielsson, together with whom the initial empirical study in 1962 was carried out. Many of the ideas which I have subsequently developed originated in our early work. I also wish to thank Mr Christian Wiechel, who carried out the interview study which provides a background to the buyer psychological analysis. Various representatives for retail firms made available price data and participated in interviews, for which I am very grateful. Mr Jarl Svensson checked my statistical calculations, and Mrs. Char lyn Hulten read through and corrected my English, which has helped to clarify my ideas. The tedious work of typing my many manuscripts has mainly been carried out by Mrs. Ingrid Ekenas, Harriet Lundh, Inger Gullden and Christina Palmer. Needless to say, this study would not have been possible without their efforts. I would like to thank all the above persons for their help. In 1966-1967 I had the privilege of spending the academic year at the University of California, Berkeley. The intellectually stimulating environment and the leisure to study without stress aided me greatly in developing the ideas presented in this study. Economic support has been received from the Svenska Handels banken's Foundation for Social Research and the Swedish Council for Social Science Research, for which I wish to thank them. Psychological support has been provided by my wife. I want to express my deepest gratitude for her continual encouragement during the course of the work. Stockholm, February 1970. Harry Nystrom 7 Contents 1 Introduction 11 1.1 Background and main ideas 11 1.2 Applicability of the analysis 20 1.3 Aim of the study 20 1.4 Some basic definitions and assumptions 21 1.4.1 Competitive definitions 21 1.4.2 Assortment definitions 22 1.4.3 Informational definitions 24 1.5 Limitation of the analysis to competition between firms 25 1.6 A note on methodology 28 1.7 Plan of the book 30 Appendix to Chapter 1 31 2 Review of the pricing literature 33 2.1 Purpose of the review 33 2.2 Basic models of competition in the theory of the firm 34 2.3 MUlti-product and multi-period models in the microeconomic tradition 36 2.4 Applications of microeconomic theory to retail pricing 39 2.4.1 Mickwitz 39 2.4.2 Applications of traditional single-product microeconomic models 40 2.4.3 Holton 40 2.4.4 Holdren 41 2.4.5 Andrews 42 2.5 Behavioristic extensions of microeconomic theory 43 2.6 Studies of retail pricing in the marketing literature 44 2.6.1 Cassady, Jr. 44 2.6.2 The Philadelphia studies 45 2.6.3 Nelson and Preston 45 2.6.4 McClelland 46 2.7 Buyer psychological aspects of pricing 46 2.7.1 Price surveys 47 2.7.2 Price experiments 48 2.7.3 Oxenfeldt 48 2.8 Summary of our pricing review 48 3 An empirical study of retail pricing, illustration of an analytical method (single-period analysis) 50 3.1 Introduction 50 3.2 Empirical background 52 3.3 Analysis of price-changes 53 3.3.1 Flexibility of pricing 54 3.3.2 Average price-changes 58 3.3.3 Accumulated price-changes 58 3.3.4 Pricing Independence 60 3.3.5 Pricing initiative 61 3.3.6 Pricing response 63 3.4 Summary of the interviews 63 3.5 Comparisons between price data and interviews 66 8 4 Applicability of the proposed operational method for studying price-change strategies 70 4.1 Introduction 70 4.2 Market forms 70 4.3 Price leadership 73 4.4 The cost element of pricing 76 4.5 Vertical cost relationships 79 4.6 Pricing organization 80 4.7 Some additional research areas 83 5 Theoretical extension to relative price levels and to a multl- period analysis 85 5.1 Introduction 85 5.2 Definitions (see Appendix for mathematical details) 86 5.3 Applicability of the price level analysis 88 5.5 Length of time periods 91 5.6 A note on the measurement of relative assortment price levels 92 Appendix to Chapter 5 96 6 Towards an extended microeconomic framework 98 6.1 Towards an extension of the price-demand relationship of traditional economic theory 98 6.2 The mechanism of price image sensitivity 104 6.3 Pricing costs 105 7 Pricing from the point of view of the Individual buyer, a theoretical framework 111 7.1 Introduction 111 7.2 The economically rational buyer 111 7.3 A psychlog1cally oriented view of buyer behavior 113 7.3.1 The psychological buyer and the concept of image 114 7.4 A comparison between the "economic" and the "psychological" buyer 116 7.5 Psychologically oriented work related to buyer behavior 117 7.6 Attempts to integrate various models of buyer behavior 119 7.7 A psychological model of individual buyer reaction to pricing 119 7.7.1 Generalization

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