Postprint version. Published in American Journal of Agricultural Economics, Volume 88, Issue 3, August 1, 2006, pages 710-726. Copyright © 2006 American Agricultural Economics Association. Published by Blackwell. The definitive version is available at http://dx.doi.org/10.1111/j.1467-8276.2006.00890.x.
Recent theoretical models of retail competition suggest that product heterogeneity is critical to retail price and variety strategies. This article provides empirical evidence on supermarket retailers' price and variety strategies using a nested constant elasticity of substitution (NCES) modeling framework. The model is estimated using chain-level scanner data for four major grocery chains in a large, urban West Coast market. The results show that retailers compete for market share using both price and variety. While they all tend to follow moderately cooperative pricing strategies, the extent to which they follow cooperative strategies in variety is less homogeneous.