Implicit Contracts and Price Stickiness: Evidence from Customer-Level Scanner Data

This paper uses scanner data at the individual customer level, compiled from the loyalty card database of a European retailer, to determine the importance of implicit contracts as a source of price stickiness. Drawing from Customer Relationship Management (CRM), we use segmentation techniques and cluster analysis to split up the customer base in three groups according to their behavioural loyalty to the retailer. We then perform a demand analysis on the loyal and nonloyal segments in parallel, discarding the large middle cluster. Our results from estimating a Behavioural Almost Ideal Demand System (B-AIDS) for numerous product categories reveal that loyal customers have a considerably more concave demand curve than non-loyals. This result holds true in the aggregate, and for all but some individual product categories. The more pronounced asymmetry in the price elasticity of demand for loyal customers is a major incentive for the retailer to commit to a sticky price.