Are products sold in supermarkets more expensive?

   Several students from economics classes and general-education classes would like to discuss supermarket pricing in their research projects. A general finding is that goods are more expensive in supermarkets than the same products sold in traditional grocery shops. The low-price impression created by supermarket advertising is found to be wrong. Some goods are cheaper but there are lots more higher-priced goods. Usually my students do not think that monopoly power can explain the higher-price phenomenon. Rather, they suggest that customers are willing to pay a higher price for a better “quality”: Shopping is not a straightforward buy-and-pay behaviour. Rather, the better shopping environment, cleaner shop and more varieties matter.
   I agree that shopping experience in supermarkets is better than in most grocery shops or wet markets. (Some people will disagree. But let us set aside this dispute, if any. If shopping experience in supermarkets is not better, then the higher-price phenomenon is even harder to explain.) Nonetheless, an explanation attributing to better quality is not too ideal. Consider the following artificial dialogue:

   “Why your goods are sold for higher prices?”

   “I offer better service.”

   “How can you prove your service is better?”

   “I can sell my goods for higher prices.”

   Just kidding. The explanation attributing to quality is not that bad. But it is fair to say that the explanation by quality is not enough, at least not very interesting, because it is too easy to make such an explanation. Every time when a higher price is found for the same product, we can always say the service accompanied with the good is better. The point is: what is this service?

   Cleaner environment? Yes, compared to wet market. But some grocery shops are also clean. Variety may be a more persuasive attribute of supermarket superiority. Although grocery shops also offer a variety of goods, supermarkets still provide a much greater variety. It is more convenient to shop in supermarkets and convenience is something that you are willing to pay to have it.

   The story may stop here, then, until recently I was inspired by other students, also from general-education class, who presented an explanation offered by the best-seller Undercover Economist by Tim Hartford. The argument goes like this. Supermarkets often change the prices for goods. Sometimes prices are cut. Sometimes prices are raised. Doing so enables supermarkets to distinguish customers. Uninformed or impatient customers will buy goods anyway. Well informed or patient customers will buy only when goods are cheaper. If prices are always high, patient buyers won’t buy. If prices are always low, sale revenue may be lower. Anyway, a steady pricing cannot distinguish the patient customers from impatient customers. Then, supermarket owners cannot charge different customers differently (the terminology adopted in microeconomics is "price discrimination"). In contrast, pricing products differently at different time increases the sellers’ profit.

   Well, my student told me this interesting explanation. Without reading the original book at that time, this story is immediately reminiscent of Hal Varian’s famous paper on television set pricing. Varian is the chief economist of Google. Before this employment, he has worked for UC Berkely for a long time and has written a famous textbook on economics of information technology. He is considered to be an expert in the economics of marketing strategies.
   What Varian observed in the paper is this. TV set sellers on and off will offer substantial price cuts. He wondered why prices are not steady. The explanation that he gave is basically the same as the supermarket pricing story told above.

   The story again may end here. But I suddenly realize that this story should be somehow related to the abundant product variety in supermarkets. As mentioned above, customers are divided into price-sensitive and price-insensitive ones depending on their knowledge and patience. But a buyer who is sensitive to the price changes in fish balls may be insensitive to the price changes in chewing gum. Your mum may be an expert in cooking food and is thus sensitive to the price of food like fish balls. However, she rarely buys chewing gum, and does not know what the cheapest quote for a gum is. Nonetheless, a price expert in some goods will not just purchase goods in which one has expertise. She or he may occasionally buy some other goods. For these goods, she or he is no longer a price expert. Putting different goods together, each buyer, as an expert in some aspects, will have the opportunity to encounter some goods that one has no expertise in prices. So, when they buy the discounted goods from supermarkets, they may also buy some goods that may be over-priced. Compared to a shop selling only one kind of products, over-priced goods are more likely to get purchased in a variety shop. When price-cuts in one good attract price experts (in one good) to visit their stores, they also attract non-experts (in another good), who are the same people, to visit and occasionally buy the over-priced goods. This is perhaps another magic to increase supermarket profits.