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Grocery Retailer Pricing Behavior for California Avocados with Implications for Industry Promotion Strategies

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  • Li, Lan
  • Carman, Hoy F.
  • Sexton, Richard J.

Abstract

Using a unique micro dataset, this paper investigates retailer pricing issues for avocados, a key California specialty commodity, and analyzes the implications of retailer pricing behavior for the effectiveness of avocado industry advertising programs. We find that retail prices for avocados are highly dispersed both spatially and temporarily. We also illustrate the existence of a "regular" retail price for avocados. Downward deviations from the "regular" price dominated changes in retail prices, in particular, temporary price reductions accounted for 27 percent of retail price variations. The study examines the effects of fundamental cost and demand factors on determination of retail prices. We conclude that costs are not a primary factor in setting retail prices for avocados. Retailers' sales strategies, which reflect decreases in retail margins rather than decreases in costs, explained much of the observed temporary price reductions for avocados. Retail prices for avocados also exhibited countercyclical movements over seasonal demand cycles. The findings provide support for Lal and Matutes' (1994) hypothesis that retailers reduce prices or margins during a product's high-demand periods. We investigate how retailers respond to industry promotions and, in turn, how retailer response enhances or vitiates the effectiveness of industry promotions. The approach of "Difference-in-Difference" is employed to evaluate the effects of the California Avocado Commission's (CAC) promotion programs on retail pricing and sales. The analysis demonstrates that the radio campaign and outdoor advertisements were successful in raising avocado sales. There is no evidence that retailers charged higher prices during the CAC's promotions. Nonetheless, the CAC's promotion programs could be enhanced if retailers were better informed about the advertising campaigns. Other noteworthy results include the fact that retail margins increased significantly as shipment volumes increased, indicating the presence of retailer oligopsony power. Also notable was the rather strong evidence that retail prices were significantly lower as a function of the amount of avocados imported from Chile and Mexico, meaning that consumers have benefited from trade liberalization for avocados.

Suggested Citation

  • Li, Lan & Carman, Hoy F. & Sexton, Richard J., 2005. "Grocery Retailer Pricing Behavior for California Avocados with Implications for Industry Promotion Strategies," 2005 Annual meeting, July 24-27, Providence, RI 19498, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea05:19498
    DOI: 10.22004/ag.econ.19498
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    Cited by:

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    2. Fertő, Imre & Bakucs, Lajos Zoltán, 2009. "Árleszállítások és a kiskereskedelmi árak változása a tejtermékek piacán [Sales and retail price patterns on the market for milk products]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 634-647.

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    More about this item

    Keywords

    Marketing;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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