The Effect of Variety Offering on Demand and Supermarket Competition: Yogurt in the Houston Metropolitan Area

The objective of this paper is to estimate the effect of pricing and variety offering on consumers’ utility and supermarket chains’ profits for yogurt products. Specifically, the authors analyze yogurt demand at the supermarket-brand level, examine the effect of variety on consumer demand and supermarket pricing conduct, and test for and measure market power of the respective supermarket chains. The demand results show that consumers are more likely to purchase a certain yogurt brand if the variety offering of that brand increases. In addition, consumer price sensitivity increases as the authors take into account the variety offering. The magnitude of the own-price elasticity increases as the price-variety interaction is included in the indirect utility. Therefore, ignoring this interaction would yield underestimated (in absolute value) elasticities and consequently overestimated price-cost margins. With respect to supply, the results indicate that supermarket chains exercise some degree of market power when selling yogurt products. However, the degree of market power is reduced as more variety is offered, mainly because of an increase in marginal cost and consumer price sensitivity. In addition, the results suggest that supermarket chains make more money selling their own brands. This creates a conflict for the supermarket chains. On one hand, consumers want greater variety, forcing the retailer to offer more national brands. On the other hand, increasing variety raises retailers’ marginal cost and ultimately retail prices, which in turn can affect demand.