Who Sets Supermarket Prices?

Why It Matters

Price zones reveal that geographic, not brand, factors drive supermarket pricing, influencing consumer costs, retailer strategy, and antitrust oversight.

Key Takeaways

• Parent retailers delegate pricing to regional divisions based on local markets.
• "Price zones" align stores of same parent across geography, not chain.
• Discount and traditional formats create separate zones within same market.
• Mergers initially multiply zones, later consolidate after two years.
• Consumers pay based on zone location, not specific supermarket brand.

Summary

The Chicago Booth Review podcast explores new research by Professor Pradeep Chintagunta on how a retailer’s organizational structure shapes supermarket prices. Rather than a single headquarters dictating every price, large parent companies split authority to regional divisions, creating “price zones” – geographic areas where all stores owned by the same parent charge identical prices, regardless of brand or chain. The study finds that these zones are driven by local market characteristics such as demographics, competition, transportation costs, and consumer willingness to pay. When a parent operates both traditional and discount formats in the same market, it deliberately assigns separate zones to exploit heterogeneous demand, resulting in coordinated pricing across chains but differentiated by format. Mergers initially inflate the number of zones—sometimes doubling them—but over roughly two years the new parent rationalizes overlapping zones into a streamlined structure. Concrete examples illustrate the concept: Whole Foods’ national ads emphasize assortment rather than price, while local newspaper inserts historically highlighted discounts, now shifted to app‑based price information. The researchers used private‑label SKUs to map which chains share a parent, uncovering cases like Dominick’s Chicago stores, which historically maintained multiple price zones within the city. These findings challenge the assumption that shoppers’ price differences stem solely from chain choice. For consumers, the key takeaway is that where a store is located matters more than its banner; price zones dictate the cost of groceries. For retailers, understanding zone dynamics informs pricing strategy, supply‑chain design, and post‑merger integration. Regulators may also scrutinize zone coordination as a subtle form of intra‑firm price alignment that can affect competition.

Original Description

Parent companies of supermarket chains often delegate the authority to set prices down to the local level. Is that a good idea, and what does it mean for shoppers? Chicago Booth’s Pradeep Chintagunta about his research on organizational structure and retail prices.