Review of Industrial Organization
12: 817–832, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Multiproduct Firms’ Pricing Behaviour in the Italian
Centre for Management under Regulation, Warwick Business School Research Bureau, University of
Department of Economics, University of Warwick, Coventry CV4 7AL, U.K.
Abstract. This paper investigates the determinants of price dispersion between different goods in
grocery retailing, as the result of pricing decisions of multiproduct retailers. Demand parameters
are generated using the LES system. These are then used to test theoretical predictions about the
nature of supermarkets’ pricing and consumers’ shopping behaviour using disaggregated data from
the Italian grocery trade. The empirical results concerning the supply function provide evidence for
the existence, in all types of retail organisation, of a monopolistic form of price discrimination. The
results are consistent with discrimination due to the exploitation of customers’ switching costs.
Key words: Multiproduct ﬁrms’ pricing, price competition in grocery retailing, Italian grocery trade,
panel data analysis.
There has in recent years been a considerable amount of work developing and
extending the notion of price discrimination and its empirical manifestations.
Following Holmes (1989) we may distinguish “monopoly type” price discrimi-
nation, where a ﬁrm in a position of market power charges different user groups
different prices according to estimates of industry elasticities of demand, from
“competitive type” price discrimination in which cross elasticities between ﬁrms
hold sway. Shepard (1991) illustrates the former in the context of gasoline stations
with both full and self servicepumps,whichhave a bigger gap between pumpprices
than single service stations. If the latter is more important, increasing competition
can result in a greater degree of price dispersion, as Borenstein and Rose (1984)
found in the U.S. airline industry.
We would like to thank John Cable, David De Meza, Aydin Hayri, Jeremy Smith, Patrick
Walsh, seminar participants in the Industrial Economics workshop at the University of Warwick
and in the Department of Economics workshop at the University of Exeter and especially a very
thoughtful anonymous referee for helpful comments and suggestions. The support of the Economic
Environment DivisionofA.C.NielsenItaly, SilvioTortora at Unioncamere is gratefully acknowledged
for providing the data. Some of the work was undertaken whilst Giulietti was at Exeter University.
The usual disclaimer applies.
By discrimination is simply meant prices higher in relation to costs in some areas than in some
other, with no necessary pejorative connotation.