Tuesday, November 29, 2016

Price Setting in Online Grocery Markets: The Case of Chocolate

Theresa Grein and Roland Herrmann discuss Price Setting in Online Grocery Markets: The Case of Chocolate.

ABSTRACT: Online markets are developing rapidly in many industrialized countries and have already reached a rather mature status for some product categories. This, however, is not the case in the food sector. In Germany, the online food market captured still less than 1 % of total food sales in 2014. Despite this small share of the online market, the segment is clearly increasing and major players on the offline grocery market engage themselves on the online market, too, or they plan to do so. It is intended in this paper to contribute to our knowledge on competitive strategies of multichannel suppliers and pure online traders which are active on this growing market segment. A major element of competitive strategies on the online market for foods is pricing. We concentrate on pricing strategies of multichannel firms and pure online traders on the German online market and present evidence for the product group chocolate. More and quicker price information for consumers will become available with the development of online markets. Theory suggests that buyers’ search costs will be lowered and market efficiency will be improved. With lower search costs, it is expected that price dispersion will be reduced, i.e. markets will tend towards the law of one price for identical goods, and that the price level will decline and adjust rapidly. It may, however, happen that online markets induce new search costs for consumers as the variety of products offered will also increase substantially. It is an empirical question whether the level and the dispersion of prices will actually fall as the online supply of foods grows. The increasing empirical evidence on non-food markets indicates that remarkable differences between various suppliers persist with the growing importance of online markets and prices remain relatively rigid over time. Different explanations for these patterns are offered in the literature including a growing importance of product differentiation and non-price strategies on online and offline markets.


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