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CONTRIBUTORS:
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JOURNAL:
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YEAR:
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2003
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PUB TYPE:
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Journal Article
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SUBJECT(S):
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pricing; prices; price; surcharges; quantity surcharges; grocery; supermarket
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DISCIPLINE:
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Business/Management
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HTTP:
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LANGUAGE:
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English
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PUB ID:
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103-409-423
(Last edited on
2004/11/05 14:12:24 US/Mountain)
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SPONSOR(S):
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ABSTRACT:
Quantity surcharges occur when the unit price of a brand’s larger package is higher than the unit price of the same brand’s equivalent smaller package. Although grocery retailers and consumers typically do not expect to encounter such pricing, quantity surcharges are relatively common in the retail grocery market. Prior research has found that quantity surcharges occur for 16% to 34% of supermarket brands available in two or more package sizes. Given evidence that quantity discounts can optimize profitability, the relatively high incidence of surcharges in the marketplace is unexpected. Research has suggested that pricing practices may result in quantity surcharges as retailers attempt to increase profits by raising prices of larger packages at the expense of consumers who neither expect nor notice surcharged items. The current research proposes a considerably different process; specifically, the authors contend that surcharges occur as retail grocery price setters, concerned about having a low store–price image, monitor and respond to competitors’ prices associated with popular brand-sizes (i.e., those stockkeeping units with the highest unit sales volume).
Study 1 examines the interactive effects of consumer demand and store–price image on retail price-setters’ behavior. An experiment with grocery price setters provides evidence of the behavior proposed to result in surcharges. In particular, price setters assigned relatively low prices to top-moving items (brand-sizes with high sales volume), and this effect was stronger among price setters concerned with establishing a low store–price image. Additional analyses indicate that price setters were more likely to create a quantity surcharge when faced with a top-moving item and concerned with establishing a low store–price image. In Study 2, the authors use data from a regional grocery chain to test the impact of brand-size demand on the prevalence of quantity surcharges and to explore the implications of surcharges on retail margins. The data set comprises price, cost, and sales volume data for grocery brands available in two or more package sizes. Study 2 results indicate that the incidence of quantity surcharges is greater among brand-size pairs in which a top-moving smaller brand-size outsells its larger (non-top-moving) counterpart. Furthermore, retail margins are lowest for small brand-sizes priced alongside surcharged large brand-sizes. Managerial and public policy implications are discussed along with areas for future study.
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