Abou-Bakr, Ahmed

Rhodes, V. James

English

Research Papers in Economics

SOUTHERN  JOURNAL OF AGRICULTURAL  ECONOMICS  DECEMBER, 1974
ADVERTISING-PRICING  CONDUCT  IN MEAT RETAILING*
V. James Rhodes and Ahmed Abou-Bakr
INTRODUCTION  particular,  are known to apply fairly uniform  policies
on  a  divisional  or  area  basis.  Affiliated  wholesalers For  a  decade  or  longer  it  has  been  recognized  wholesalers
provide  suggested  price  lists  and suggest much of the that  pricing of food products in supermarkets  is not a  p  s 
matter  of  competitive  price  discovery  but  of  format  for  the  weekly  ads.  An  important  research
intricately  interwoven  pricing  and  merchandising  advantage  of such  a market  area  is  that it  provides a intricately  interwoven  pricing  and  merchandising
strategy.  In  the  search  for  patterns  of that strategy,  same  o  cnuct  frm  seeral  lr,  orl  ing
market  areas  embracing  much  of  Missouri,  Illinois, the  more  conventional  approach  has  been  to  apply 
customary  data  on  market  structure.  In  a  further  andKansas.
search  for  conduct  patterns,  because  of  the
prohibitive expense  of a  compr  e  m  y  This  study differs  from most retail  studies  in its
prohibitive  expense  of  a  comprehensive  multi-city  . . very  intensive  coverage  of  the  meat  counter.  The
study, the best  research course is to build up a library  y  ine  oerae  of te  eat  o study included  virtually  all beef,  pork, and poultry
of case  studies.  This case study of 14 supermarkets in  s  i  v  items,  excluding the  variety meats, lunch meats, and
Columbia,  Mo.,  reports  two  contrasting  patterns  of  ese  g sausages.
advertising-pricing  behavior.  Prices  are  not  varied  as
much as the ads imply.  In-store  prices  were  obtained  for  13  consecutive
weekends  (June  to  September  1971)  in  six  large
supermarkets.  Three supermarkets  were units of three
DATA  SOURCES  national  chains; the other three are classified together
The  data reported  here  are  derived from  a study  as  affiliates  in  this  report,  although  one, A-3,  was a The  data reported  here  are  derived from a study
member  of  a  small  regional  corporate  group.
of retail  food prices  and ads in Columbia, Mo., a city  m  o  ae
oe  St.  Los  an  Advertised  prices  of  meats  were  obtained  from of  60,000.  Located  midway  between  St.  Louis  and Ks  City0  . ,oitse1  superm aetsweenS  serice  ad  b-  weekly  newspaper  ads for  all  14 of the supermarkets
Kansas  City, its  14  supermarkets  were serviced  by  . - K and  to  s  a  4  vayigext  rent  manag  evied  by  - ca  in the area for the same  13-week period plus the three
and  to  a  varying  extent,  managed  by  - chain
weeks preceding. divisional  headquarters  and  affiliate  wholesalers
located  elsewhere.  For  a  small  city,  it  had  an  Employment  patterns  in  Columbia  generate  a
impressive  array of competing food retailers with one  very  high  proportion  of white-collar  workers  and  a
unit  each of five  national  chains;  four independently  high  proportion  of  upper-middle-income  families.
owned  affiliates,  associated  two  each with two  large  With  the  exception  of  supermarket  A-3,  which
wholesalers,  and  one unit  each  of five  small regional  catered  mainly  to  a  lower-income  market  segment,
chains.  In  addition, there were a very few small  stores  the  product  mix  of  the  other  five  supermarkets
of the convenience  and neighborhood  types.  reflected the  general income pattern described.  Fresh
Pricing and  advertising  conduct  in such a market  beef  was  generally  choice  grade  and  the  quality  of
obviously  has  strong  external  influences.  Chains,  in  other meats was quite uniform and high level.
V.  James  Rhodes  is  Professor  of agricultural  economics  and  Ahmed Abou-Bakr  is  a former graduate  student at the University  of
Missouri.  Most  of the field  work and some of the analysis was done by Ahmed  Abou-Bakr.  The authors appreciate  computational
assistance  from  Roger  Schneider  and  David  Garrett  of Dept.  of Agricultural  Economics,  technical  assistance  from  Professor
William Stringer of the Dept. of Food Science and a review by  Professor Harold  Breimyer.
*Mo. Ag.  Exper. Sta. Research  Bul.  1006.
59RELATION OF ADVERTISED  AND  examine  the concept  of variable  price merchandising
NON-ADVERTISED  PRICES  (VPM).
Are ad prices lower?  VARIABLE  PRICE MERCHANDISING
Are the prices in the weekly newspaper ads lower  Nelson  and Preston  [10]  suggested  that we  can
than:  (a)  usual  non-advertised  prices for  those items  better  understand  the  weekly  variations  in  the
in those  stores,  or (b)  the prices  of comparable items  individual  prices  of  food  (given  generally  stable
in  other  stores  of  that  city?  Previous  evidence  has  wholesale  prices)  in  terms  of overall  merchandising
appeared  to  be  possibly,  although  not  necessarily,  strategies  rather than in terms of specific competitive
contradictory.  Studies  in  both  California  [12]  and  interactions.
Philadelphia  [15]  in the early  1960's  concluded that  " ..  variable-price  merchandising  is the frequent
a majority of the  food items  in  the ads had not been  upward  and  downward  manipulation  of prices  on
reduced  in  price.  On  the  other hand, special studies  selected  items  within  a  multi-product  firm  for  the
for  the  National  Commission  on  Food  Marketing  purpose of drawing attention to its market offerings .
concluded that weekend specials of meats represented  . "  [10,  p.  98].  VPM  is  more  than  weekend
such  significant  reductions  that  USDA  data  on  specialing  - it  is the  systematic raising  and lowering
margins  needed  to  be  recomputed  to  reflect  their  of various  prices  for various  time periods. While they
impact  [4,  8,  9].  Another  study  in  22  midwestern  observed  elsewhere  in their  study that  some  items  in
cities supported  the impact  of large weekend specials  the ads  were not price  reductions,  it appears obvious
[11].  Fewer data  are  available  on the  second  part of  that  an excellent  method  of "drawing  attention"  by
the  question  as  to  whether  ad prices  are  lower than  pice  manipulation  is  to  put  the  price  reductions in
non-advertised  prices  in  competing  stores.  A  1960  the ads.
survey  in  Palo  Alto  of  frequently  advertised  items  The  affiliate and chain supermarkets in Columbia
found  that  food  prices  were  lower  in  stores  followed  two  different  advertising-pricing  patterns.4
advertising  the  items  that  week  than  in  stores  not  The  affiliate  stores  - consistent  with  the  general
advertising  them in 92  percent  of the cases observed.  import  of the  Food Commission  studies  and of VPM
The mean of advertised  prices  was only  78.6 percent  - manipulated many prices  and had price reductions
of the mean of non-advertised  prices  [6].  in  a  majority  of their  weekly  ad-items.  They  also
As in the  Philadelphia  study, a  small majority of  generally  underpriced  the  chains  in  their  ads  while
the  ad items  in  our study were not price  reductions  overpricing  them in their  non-advertised  meat prices.
from  the  previous  week.  However,  there  were  very  The  conduct  of  the  chain  stores  suggests  a
large variations among supermarkets.  significantly  different  version  of  VPM.  They  also
Advertised  prices  averaged  lower  in  Columbia  manipulated  many  prices,  but  advertised  price
than  non-advertised  prices,  but  much  closer  than in  reductions in  only a  small  minority of their ad-items.
the Palo  Alto study.  A comparison  of ad and non-ad  As  indicated  in  Table  1,  their  non-advertised  prices
prices  for  98  meat items, which  were each advertised  were  lower  than  the affiliates,  while  their advertised
a minimum  of eight weeks of the  16, indicated the ad  prices  were  less competitive.  The exception is affiliate
prices  averaged 91.2 percent of non-ad prices.l  A-3  which  catered  to a lower  income  segment.  Even
It  is  possible  to  reconcile  all  of these  results - it,  however,  was  closer  to  the  chains  on
excepting perhaps Palo  Alto  - with  a single behavior  non-advertised  prices than on ad-prices.
pattern  in  which  most  advertised  prices  remain  While both groups  advertised  the prices  of many
unchanged  but  a  minority  represent  deep  price  meat  items and while  both groups manipulated  many
cuts.2 However,  it  is  quite  possible that two or more  prices  weekly,  the pricing-advertising  interaction  was
patterns  of  advertising-pricing  behavior  have  been  much different.  The  chains tended  to advertise  many
observed.  Before  we  examine  data  supporting  the  items  for  several  consecutive  weeks  at  unchanging,
two-or-more-patterns  hypothesis,  it may be  useful to  albeit  usually  quite  competitive prices.  The  affiliates
1Unweighted  means of non-ad  prices in the six stores and ad prices in the 14 stores.
2 While  differences  could  be  attributed to the  coverage  of all foods  in  some  of the studies and  to meats  alone  in the
others, the former  studies do not indicate any deviations in the advertising  patterns of meats compared  to other foods.
3 This is not to deny  the possible  presence of oligopolistic and other competitive  interactions as they  affect general price
levels of competing supermarkets.  See  [2,  3,  10,  12].
4Our  focus  is  on the existence  of  the differing  patterns rather than the  possible  happenstance  that the patterns were
associated  with  national  chain and affiliate groupings.  As already noted,  A-3, as a small regional  chain, could be classified  with the
chains rather than the affiliates.
60Table  1.  PRICE INDICES--ALL MEATS,  COLUMBIA,  MO.,  1971a
Ad Pricesb  Non-advertised  Pricesb
C-  c  98  94
C-2  103  101
C-3  105  101
A-1  97  103
A-2  100  104
A-3  88  91
aA  store  index was  computed  for each  item by computing  the mean price of that item for all stores
and converting  that  mean to a  base  of 100. The  overall  store index  is a  mean of the  store  indices for each item
and thus each item has equal weight.
bThe indices of ad prices are based on 26 items (14 beef,  8  pork and 4 poultry) which met the criteria
of  (1)  being  advertised  by  2  or  more  stores  and  (2)  having  16  or  more  total  observations.  The  indices  of
non-advertised  prices  are based on 54  items (27 beef, 20 pork and 7 poultry) which met the criteria of having 26
or  more  observations  (total possible  -- 78 if all stores  carried all weeks). The separate computation of indices for
the two  sets of prices prevents any direct comparison of ad and non-ad indices.
CThe C & A prefixes identify the chain  and affiliate stores.
tended  toward  a  periodic  cycle  of  specials:  for  12].  Table  3  illustrates  such  findings  in  Columbia.
example,  a beef roast  sale  every  three  or four weeks;  There  is  no  need  to  repeat  here  the  various
likewise,  a ham  or pork steak group  of specials; then  hypotheses  which  have been suggested  for explaining
broilers  might be featured in a similar cycle (Table  2).  why  consumer  behavior  has  not  eliminated  such
It  is hypothesized  that these  divergent  patterns  pricing  differentials.  The  point  is  that  the  chain
of conduct  were associated  with differing strategies of  merchandising  behavior  observed  in this study is not
merchandising.  The  affiliates  with  their  "specials"  inconsistent  with much of the pricing results  reported
version  of VPM  were  relying  upon a changing  set of  elsewhere.
weekly  "bargains"  to  attract  customers.  The  chains  The  next  logical  question  is  whether  the  two
had  developed  more  of an everyday  reasonable  price  types  of  observed  merchandising  patterns  can  long
image  which permitted  - even  required  - much  less  coexist?  We  can  only  speculate.  The  marketing
divergence  of  their  advertised  and  non-advertised  specialist  probably  would  argue  in  terms  of market
prices.  segments.  If  a  sizeable  portion  of  customers  is
What  market  characteristics  might  permit  and  attracted  by  temporary  price  cuts,  then  that
encourage  the  smaller  divergence  of ad  and  non-ad  merchandising  strategy may  continue  to be viable for
prices  observed in  these  chain  stores?  The  policy has  some  supermarkets.  Or  perhaps  the  other  non-price
several  possible  benefits  for  management.  It reduces  attractions  of  most  supermarkets,  including  the
greatly the administrative problems of changing prices  convenience  of  location,  are  such  that  the
of  "specials"  for  the  ad  period.  It  reduces  the  advertising-pricing  strategy  really  doesn't  matter
inventory  and  labor  problems  associated  with  large  much  to  a  large  market  segment.  Then  whatever
fluctuations  in  weekly  sales  - problems  of  advertising-pricing  strategies  now exist may continue.
considerable  significance  in such  items  as fresh meats  SUMMARY AND CONCLUSIONS
with  their high perishability  and their requirement  of
much processing  and handling at store level.  The  weekend special - an advertised price cut on
The  crucial  test,  then,  is  that  of the  market.  In  numerous items  - has occupied  a central place in the
any  given  market,  is  there  a  market  segment  of  agricultural  economist's  view  of  retail  food  pricing.
consumers  who  will  patronize  adequately  the  Nelson  and  Preston,  [10],  with  their  concept  of
supermarkets  pursuing such a merchandising  strategy?  variable  price  merchandising,  emphasized  the
One  piece  of  supporting  evidence  is  the  fact  that  merchandising-promotional  aspects  of  the  weekly
numerous  studies  have  shown  the  persistence  of  manipulation  of prices.  Prices  are manipulated  more
sizeable  inter-store  price differences  in specific  items  to attract  customer attention  than in any  discernible
and in market baskets  over large periods  [3, 7, 10, 11,  pattern of oligopolistic interaction.
61Table  2.  ADVERTISING  PATTERNS  OBSERVED  IN  SUPERMARKETS,  16  WEEKS,  1971,  COLUMBIA,
MO.
Average mentions  % of items  Index
Supermarkets  per item  mentioned  of
9 or more times  Duplication
Chains
C-  5a  5  .44b
C-2  5  5  .35
C-3  6  6  .55
Affiliates
A-  3  0  .07
A-2  3  0  .02
A-3  3  1  .19
aIndicates  that  each  item  that  was  advertised  appeared  in  the  ads  an  average  of 5 weeks  in  the
16-week  period.  While  all  items  in  this  analysis  appeared  at least  8  of the  16  weeks  in the ad of one  or more
stores, the mean appearances in a given store were always less than 8.
bThis  index measures the extent to which each week's ad is duplicated the next week. The index is so
constructed  that it would  equal  1.0 if the same  set of items were advertised all  16 weeks and would equal zero if
there were one or more intervening weeks between  all ad-mentions of each item.
Table 3.  MEANa  IN-STORE PRICES OF SEVEN  COMMON  ITEMS, COLUMBIA,  MO.,  1971
Stores
C-l  C-2  C-3  A-1  A-2  A-3
Center
chuck
roast  .65  .83  .79  .76  .71  .90
Rib  Steak  1.04  1.16  1.26  1.46  1.57  1.04
Ground beef
(I  lb.
size)  .63  .69  .59  .73  .72  .67
Whole
broilers  .32  .36  .38  .34  .38  .27
Bacon
(first
line)  .79  .89  .69  .86  .90  .73
Pork loin
(/4  loin)  .73  .74  .66  .77  .73
Pork steak  .53  .72  .67  .74  .69  .56
Simple
means  .67  .77  .72  .80  .81  .69
aMean of all weekend prices in the 13-week period.
62Our  research  identifies  two  patterns  of  The  implications  for further  research  are several.
merchandising  conduct  and  speculates  on  the  Are  there  generally  two  such  advertising-pricing
rationale  of the  strategies  behind  them.  On the  one  patterns in most market  areas? Can two such patterns
hand,  the  advertised  price  cut  was  very  much  in  be  expected  to  coexist,  or  is  the  temporary  price
evidence  in some  affiliate supermarkets.  On the other  special  on the  way  out?  Are  these  results unique to
hand,  the ads of some chain supermarkets  in the same  meats or do they apply to the entire supermarket?  Do
market  area  contained  few  price  cuts.  Instead,  national  chains  usually  adopt  the  one  pattern  and
numerous  items  were  advertised  for  many  weeks  at  affiliates  the  other?  What  are  the  implications  for
unchanged  but  competitive  prices.  Of  the  five  consumer  satisfaction?  It  is  clear,  for  example,  that
supermarkets  catering  to  the  same  income  level  of  Columbia  consumers  would  be  misled  if they  infer
consumers,  the  three chains without the large specials  the  level  of  all  meat  prices  in  each  supermarket  by
had  a  lower  level  of non-advertised  meat prices  than  comparing meat prices in the weekly ads.
the other two markets.
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63I

Administered Prices and Retail Grocery Advertising.&quot;

Advertised Specials and Local Competition Among Supermarkets.&quot;

An Empirical Investigation into the Relationship Between Market Structure and Performance as Measured by Prices.&quot;

An Empirical Study of Metropolitan Market Conduct in Food Retailing..&quot; Unpublished M.S. thesis,

Customer Responses to Retail Meat Prices and Ads.&quot;

Effects of Specials on Composite Meat Prices.&quot;

Grocery Chain Store Prices - A Case Study.&quot;

National Commission on Food Marketing. Cost Components of Farm-Retail Price Spreads for Food.

National Commission on Food Marketing. Organization and Competition in Food Retailing.

ADVERTISING-PRICING CONDUCT IN MEAT RETAILING

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