Flanking In A Price War

7 Pages 1706 Words

Article Main Point Summary

The article “Flanking in a Price War” discusses a pricing experiment that was conducted in the Quebec grocery industry. The experiment was initiated by a grocery chain in Quebec that was concerned about a possible price war between the major players in the market. The article introduces us to the four leading grocery retailers and provides us with some historical background on the industry. It primarily focuses on Steinberg Inc. who was the market leader until 1980 and had created heavy entry barriers to the industry through a strategy of price slashing. As a result, the market was reduced to four major players with Steinberg’s share declining into third place. The concern that Steinberg may initiate a price war in an effort to improve its position in the market led the president of IGA to seek help from US and Canadian academia to understand the sales response of different goods to price changes in order to develop the best pricing strategy. The experiment relied on the Bayesian theory and revealed that there were two categories of products, stock-up goods and non-stock-up goods, with different price sensitivities.

Pricing Experiment Design

The experiment was conducted with a Bayesian framework to identify the most profitable price strategy. This allowed three different price strategies to be used: raising prices of stock-up/non stock up goods by 20%, selling them at price level or at 20% below price level. It was confirmed that consumers were quite sensitive to price changes in stock-up items, more significantly towards price reductions rather than price increases. Total grocery sales were used as a covariate to minimize the effects of market and environmental noise. The study design also included a stop rule to indicate when to stop the study and minimize the amount of profit that would be lost. Sales data was transformed into utility values for the manager. This ensured the decis...