Showing papers by "David Bell published in 1998"

Determining where to shop: Fixed and variable costs of shopping

Abstract: The authors develop and test a new model of store choice behavior whose basic premise is that each shopper is more likely to visit the store with the lowest total shopping cost The total shopping

Shopping Behavior and Consumer Preference for Store Price Format: Why Large Basket Shoppers Prefer Edlp

Abstract: In recent years, the supermarket industry has become increasingly competitive. One outcome has been the proliferation of a variety of pricing formats, and considerable debate among academics and practitioners about how these formats affect consumers' store choice behavior. This paper advances the idea that consumer shopping behavior as defined by average size of the shopping basket and the frequency of store visits is an important determinant of the store choice decision when stores offer different price formats. A recent Wall Street Journal article that summarized the result of Bruno's management switching the chain from EDLP to HILO illustrates the importance of this issue: "The company's price-conscious customers, used to shopping for a fixed basket of goods, stayed away in droves." Thus, the audience for this paper includes practitioners and academics who wish to understand store choices or predict how a change in price format might affect store profitability and the mix of clientele that shop there. This paper attempts to understand the relationship between grocery shopping behavior, retail price format, and store choice by posing and answering the following questions. First, after controlling for other factors e.g., distance to the store, prior experience in the store, advertised specials, do consumer expectations about prices for a basket of grocery products "expected basket attractiveness" influence the store choice decision? This is a fairly straightforward test of the effect of price expectations on store choice. Second, are different pricing formats EDLP or HILO more or less attractive to different types of shoppers? To adequately answer the second question, we must link consumers' category purchase decisions, which collectively define the market basket, and the store choice decision. We study the research questions using two complementary approaches. First, we develop a stylized theory of consumer shopping behavior under price uncertainty. The principal features and results from the stylized model can be summarized as follows. Shoppers are defined in a relative sense as either large or small basket shoppers. Thus, we abstract from the vicissitudes of individual shopping trips and focus on meaningful differences across shoppers in terms of the expected basket size per trip. The shoppers make category purchase incidence decisions and can choose to shop in either an EDLP or a HILO store. Large basket shoppers are shoppers who have a relatively high probability of purchase for any given category, and as such they are more captive to prices across many different categories. The first two propositions summarize the price responsiveness of shoppers. In particular, the large basket shoppers are less responsive to price in their individual category purchase incidence decisions; this makes them more responsive to the expected basket price in their store choice decisions. This key structural implication of the model highlights an asymmetry between response at the category level and response at the store level. The result is quite intuitive; a large basket shopper with less ability to respond to prices in individual product categories will be more sensitive to the expected cost of the overall portfolio the market basket when choosing a store. The final proposition derives the price at which a given shopper will be indifferent between an EDLP and a HILO store. The key insight is that as a shopper increases his or her tendency to become a large basket shopper, the EDLP store can increase its constant price closer and closer to the average price in the HILO store. Conversely, as the shopper becomes more of small basket shopper, the EDLP store must lower its price closer to the deal price in the HILO store. Thus, we have the interesting result that small basket shoppers prefer HILO stores, even at higher average prices. The empirical testing mirrors the development of the consumer theory. We test the implications of the propositions using a market basket scanner panel database. The database includes two years of shopping data for 1,042 households in two separate market areas. We first use household-level grocery expenditures to model the probability that a household is a large or small basket shopper. Subsequently, we estimate purchase incidence and store choice models. We find that after controlling for important factors such as household distance to the store, previous experience in the store, and advertised specials, price expectations for the basket influence store choice. Furthermore, EDLP stores get a greater than expected share of business from large basket shoppers; HILO stores get a greater than expected share from small basket shoppers. Consistent with the implications of the propositions, large basket shoppers are relatively price inelastic in their category purchase incidence decisions and price elastic in their store choice decisions.

Rational shopping behavior and the option value of variable pricing

Abstract: When a product's price fluctuates at a store, how should rational, cost-minimizing shoppers shop for it? Specifically, how frequently should they visit the store, and how much of the product should they buy when they get there? Would this rational shopping behavior differ across Every Day Low Price (EDLP) and Promotional Pricing (HILO) stores? If shoppers are rational, which retail price format is more profitable, EDLP or HILO? To answer these questions, we develop a normative model that shows how rational customers should shop when the price of the product is random. We derive a closed-form expression for the optimal purchasing policy and show that the optimal quantity to purchase under a given price scenario is linearly decreasing in the difference between the price under that scenario and the average price. This purchase flexibility due to price variability has a direct impact on shopping frequency. Indeed, the benefit of this purchase flexibility can be captured via an "option value" that implicitly reduces the fixed cost associated with each shopping trip. Consequently, rational shoppers should shop more often and buy fewer units per trip when they face higher price variability. Our results suggest that if two stores charge the same average price for a product, rational shoppers incur a lower level of expenditure at the store with a higher price variability. Since stores with different price variabilities coexist in practice, we expect stores with higher price variability to charge a higher average price. Thus, given two stores, a higher relative mean price for a given item should be indicative of higher price variability, and vice versa. These model implications are tested using multicategory scanner panel data from 513 households and pricing data for three stores (two EDLP stores and one HILO store) and 33 product categories over a two-year period. We find strong empirical support for the model implications.