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Supermarket Pricing Strategies

Friday, November 30, 2012
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Various news sources are reporting about the industry agreed self-regulation adopted by most supermarkets this week relating to the pricing strategy of charging an initially high price for a product only to discount the same product fairly quickly - giving the impression that the product has much greater value after discounting (this report from This is Money gives a couple of examples).  Most of the supermakets have agreed to temper this strategy by ensuring that products are not discounted for any longer a period of time then when they were at the higher price.

Some would call the strategy a 'con' - the supermarkets can only undertake this method as they have significant power and control within the market and can afford to have low sales of the products initially.  However, there is nothing illegal about the practice.

Whilst this is a good example to show students of how market power can impact on price controls within an oligopolistic market, it also struck me as a decent example of game theory in place.

A noticeable non-signature on the agreement is that of the US-owned Asda stores.  In one sense, this is a brave move on Asda's behalf - their lack of agreement to the new plan may cause some concerns with their customers, especially given that the other supermarkets have subscribed.  It may be, however, that Asda are relying on the fact that the news about this self-regulation is not widespread or that consumers soon forget about the agreement.  Another interesting question would be whether all of the other supermarkets knew that Asda were not signing up - have they agreed to undertake a policy that reduces potential customers and allowed Asda an advantage?



 

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