ZONE PRICING IN RETAIL OLIGOPOLY By Brian Adams and Kevin R. Williams February 2017 COWLES FOUNDATION DISCUSSION PAPER NO. 2079 COWLES FOUNDATION FOR RESEARCH IN ECONOMICS YALE UNIVERSITY Box 208281 New Haven, Connecticut 06520-8281 http://cowles.yale.edu/ ZONE PRICING IN RETAIL OLIGOPOLY Brian Adams Kevin R. Williams Bureau of Labor Statistics∗ Yale Universityy February 2017z Abstract We quantify the welfare effects of zone pricing, or setting common prices across distinct markets, in retail oligopoly. Although monopolists can only increase profits by price discriminating, this need not be true when firms face competition. With novel data covering the retail home improvement industry, we find that Home Depot would benefit from finer pricing but that Lowe’s would prefer coarser pricing. The use of zone pricing softens competition in markets where firms compete, but it shields con- sumers from higher prices in markets where firms might otherwise exercise market power. Overall, zone pricing produces higher consumer surplus than finer pricing discrimination does. JEL Classification: C13, L67, L81 ∗
[email protected] [email protected] zA previous version of this paper circulated under the title, "Zone Pricing and Strategic Interaction: Evidence from Drywall." We thank the seminar participants at the University of Minnesota, California State University-East Bay, Marketing Science, University of Wisconsin-Madison, Yale University, Econometric Society Summer Meetings, University of Massachusetts-Amherst, Bureau of Labor Statistics, Department of Justice, Federal Trade Commission, University of Pennsylvania, and the AEA Winter Meetings for useful comments. We thank Bonnie Murphie and Ryan Ogden for their assistance with Bureau of Labor Statistics data.