Multi-category demand and supermarket pricing

When a supermarket cuts its price for one product category it may increase the demand for another by drawing more consumers into the store. We call this a multi-category effect. We contrast the prominent role that the multi-category nature of supermarket shopping has enjoyed in competition policy discussion – and in the theoretical literature on supermarket pricing – with its lack of prominence in the empirical IO literature on pricing incentives for products sold in supermarkets. Using a data set of store-category choices from the UK we document empirical features of supermarket shopping and find that these are consistent with the multi-store multi-category framework of many theoretical models of retail pricing. We report on a project in progress that empirically models consumer demand allowing for multiple demand categories and two store shopping, and describe how the model can be used to measure the empirical importance of multi-category effects in supermarket pricing.