168-014 Bakucz Ferto.Indd

Agric.Econ – Czech, 61, 2015 (11): 511–521 Original Paper doi: 10.17221/168/2014-AGRICECON Empirical tests of sale theories: Hungarian milk prices Zoltán BAKUCS1,2, Imre FERTŐ1,2,3 1Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, Budapest, Hungary 2Corvinus University of Budapest, Budapest, Hungary 3University of Kaposvár, Kaposvár, Hungary Abstract: Th e paper tests various predictions of the sale theory literature, using the retailer specifi c price data in Hungary. Besides being set in a New Member State, characterised by rather diff erent history of retailing than the established market economies, one of the main innovations of this paper is the comparative assessment of price promotions of two homogenous, every-day products diff erent only with respect to their perishability: one litre boxed and one litre durable fl uid milk. Using a battery of empirical techniques from the simple summary statistics, the distribution analysis to the discrete choice models and the co-integration, there is concluded that competing theory predictions on price distributions are not accep- ted. Also the Hypothesis that manufacturers determine timing of sales is rejected. Th e results do not confi rm that durable goods should have a qualitatively diff erent pricing pattern than perishable products. When the temporal order of sales is considered, the estimations support the Hypothesis of alternate sales. In sum, the predictions of the existing retail sales models only partly confi rm certain empirical aspects of price promotions. Key words: chain level prices, milk products, price promotion, sale theories Periodic price reductions, or price promotions, manufacturers or rather retailers decide on sales, constitute a widely observed phenomenon in retail- pricing strategies followed by retailers etc.). Despite ing. It is difficult to overstate the importance of price of its growing importance – especially when food promotions from both the retailer (recent estimates for products are considered – only a limited number of USA show 58% of all retailer marketing expenditures empirical papers focused on sales and their impact going for sales promotions, Allender and Richards upon retail prices (e.g. MacDonald 2000; Pesendorfer 2012) and the consumer points of view. Sales oc- 2002; Chevalier et al. 2003; Berck et al. 2008). The cur on a regular basis, which suggests that they are choice of a food item of the above mentioned papers not entirely due to random variations such as the reflects the need of an universally available homog- shocks to inventory holdings or demand. In recent enous product such as orange juice (e.g. Dutta et years, the frequency of periodic price reductions has al. 2002; Berck et al. 2008) or ketchup (Pesendorfer increased, indicating that the price promotion has 2002). Although included in baskets of the analysed become more important for retailers and consum- food items by few papers (e.g. Carman and Sexton ers. Assuming that consumers have some familiarity 2005; Eichenbaum et al. 2008), we could not find with the complex pricing strategies employed by the examples in the international literature specifically supermarkets, during the past decades a number of focusing on the milk price promotions. Most of the competing sale theories were developed to explain related studies employing milk price data focuses on discounts and price dispersion (e.g. Salop and Stiglitz analysing the effects of the milk promotion programs 1982; Varian 1980; Sobel 1984; Pesendorfer 2002). (generic milk advertising), see for example Lenz et al. Many recent papers suggest that most of the retail 1988 or more recently, Gvillo et al. 2014 or Tikkanen price variation can be explained by the temporary 2015. Albeit milk consumption in Hungary follows price reductions (e.g. Hosken and Reiffen 2004; Li et a decreasing trend, from around 170 litres in 2009 al. 2005). Yet the recently developed theories of sales to 155 litre in 2014 for those regularly consuming often provide conflicting predictions for many aspects milk (equivalent of 53 litres/cap in 2009 and slightly of price promotions (e.g. timing of sales, whether below 50 litres/cap in 2013 when the total population 511 Original Paper Agric.Econ – Czech, 61, 2015 (11): 511–521 doi: 10.17221/168/2014-AGRICECON is considered1), the boxed and UHT (durable)2 milk elasticity of demand may experience a threefold in- still constitute important staples in the populations’ crease. Generally, the literature considers the search diet. More, milk is considered to be often used (along cost of well-informed consumers being zero, whilst with the in-store fresh bakery products) as a cos- others facing substantial search costs. A number of tumer attractor by retailers. The fact that the same empirically testable hypotheses may result from the product, fluid milk, is available in the perishable and sale theories. The paper closest to our research is durable form alike makes it an attractive subject for Berck et al. (2008), empirically testing sale theories testing empirically the predictions of the existing using the retail chain specific price data of the frozen sale theories. To achieve this, we use a wide range and refrigerated orange juice, somewhat similar to the of quantitative techniques from simple descriptive boxed and storable milk employed in this study. Thus statistics to the correlation analysis of retail specific in the following sections, we follow their example by prices, the causality analysis, discrete choice models, briefly discussing the theory and empirical examples the co-integration and panel co-integration. Whilst from the literature (where applicable) than formulate the literature on price promotions is abundant, to the the hypotheses to be tested. best of our knowledge, there is no published research Shilony (1977) and Varian (1980) discuss a static focusing on empirical testing of sale hypotheses in sales model with retailers pursuing a mixed strategy. a Central East European Country, with a history of In this model, sales are explained by the differences the modern type retailing dating back only 25 years. with respect to how well informed the consumers are. Since the consumers with a high willingness to pay make immediate purchases, the retailers com- COMPETING PRICE PROMOTION pete for the costumers only willing to buy when the THEORIES prices are low. Thus the oligopolistic retailers offer homogenous products for sale, using a mixed strategy Starting with earlier papers, one stream of research by determining the temporary low prices at a level describes the sales phenomena as a temporary price that attracts these costumer groups. If we consider discrimination, explained by alternating consumer the process as a game, and repeat it independently preferences and tastes, otherwise defined as the im- during a number of periods, than the mixed strategy perfect knowledge on prices (Salop 1977; Salop and results an explicit price oscillation with a continuous Stiglitz 1982). Research papers emphasise, that firms probability distribution. Facing competition, firms are motivated to apply the price discrimination, since are more likely to drop prices, rather than to follow some consumer groups are purchasing larger quan- a price discrimination strategy. Thus the following tities when prices are low, and store them at home, hypotheses arise: whilst the consumers with a higher willingness to pay Hypothesis 1. Price promotions induce specific price make purchases according to their immediate needs distribution on the market (Conlisk et al. 1984; Sobel 1984; Pesendorfer 2002). Hypothesis 1a. The distribution of prices is continu- Other branch of the literature considers firms fol- ous (most likely bell shaped) lowing a mixed strategy in order to determine prices Conlisk et al. (1984), shows that the sales of durable (Shilony 1977; Varian, 1980; Lal 1990; Lal and Villas- (e.g. UHT milk) products can be a useful tool of the Boas 1998). Most theoretical models within this group price discrimination against eager costumers char- assume there are at least two or more different types acterised by an inelastic demand. In the monopolies of consumers, characterised by varying search costs. model of Conlisk et al. (1984), the retailers employ Several papers have highlighted the importance of a cyclical pricing strategy. Periodical discounts are search costs. As an example, Seiler (2012) found that aimed at the consumers with relatively low reservation in 70% of shopping trips, consumers are not aware prices, whilst the periods characterised by high prices of competing prices because of the search costs. are for the consumers with relatively high reservation Applying a counterfactual exercise, Seiler (2012) prices. Other relevant research (e.g. Stokey 1979 and suggests that should the search costs be halved, the 1981) analyses the temporary price drops, i.e. the inter- 1Data from Hungarian Central Statistical Agency. 2Throughout this paper, we use boxed and perishable milk as synonyms. Similarly, UHT, storable and durable milk are also interchangeable terms is this research. 512 Agric.Econ – Czech, 61, 2015 (11): 511–521 Original Paper doi: 10.17221/168/2014-AGRICECON temporary price discrimination of durable products. motions at the retail level is rather weak, and thus These models, however, do not explain the phenomena potentially easily ignored. Thus we expect to reject of temporary price promotions. Sobel (1984) augments the Hypothesis defined as: the Conlisk et al.

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