COLUMBUS, Ohio -- Supermarket managers think you're watching the prices of some of their goods -- like bananas and milk -- very closely.
That's why managers are likely to match competitors' price cuts on these highly visible products -- but won't match competitors' price increases, a new study suggests.
"Our results run counter to the popular view that businessmen in this country conspire to set higher prices," said Peter Dickson, professor of marketing at Ohio State University's Fisher College of Business.
"If anything, supermarkets are too price competitive on some products."
The study, published in a recent issue of the Journal of Retailing, involved a nationwide sample of 174 supermarket managers and executives responsible for setting prices at their stores. Dickson and co-author Joel Urbany of the University of Notre Dame conducted the study to find out how store managers make their pricing decisions.
The managers were given a hypothetical situation in which
they had to react to price cuts and increases on eight different products from competing stores in their area.
The results indicated that some products have special significance to managers, Dickson said. Managers believe consumers use these products -- generally staple items which are bought frequently -- to judge a store's price image.
"What the supermarket has to do is find out which products their customers use to judge prices and then have the lowest price on those items," Dickson said.
In this study, bananas were one such "price image" product. When a competing store cut prices on bananas, the managers in the study said they would beat that new price by an additional 9 percent. When the competing store raised prices on bananas, the managers said they would still cut prices 3 percent to expand their price image advantage.
But managers don't react this strongly to all price cuts by competitors. If a competing store lowered prices on orange juice, the managers surveyed said they would lower their price -- but only one-fifth as much as their competitor. However, if the other store raised prices on orange juice, the managers said they would match about 90 percent of the price increase.
This suggests that managers believe consumers don't pay as much attention to orange juice prices as they do to prices on bananas, Dickson said.
Of the eight products in the study, five fit the profile of price image products. They were bananas, milk, Coca-Cola, bologna and mayonnaise. For two items -- orange juice and corn flakes -- managers were more likely to follow competitors' price hikes than price cuts. There was no strong effect either way for coffee prices.
Another wrinkle was also added to the study: managers were told either that a low percentage (10 to 25 percent) or a high percentage (75 percent) of the consumers in their area were active price comparison shoppers. Surprisingly, this didn't have an effect on the managers' pricing strategies. Dickson said he had believed that managers who were told consumers weren't comparison shoppers would be less likely to cut prices and more likely to raise them. But that wasn't true.
"I think this shows that the supermarket industry is very competitive and managers are aggressive about attracting consumers based on price," Dickson said.
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Contact: Peter Dickson, (614) 292-0879
Written by Jeff Grabmeier, (614) 292-8457