Retailer heterogeneity and price transmission

Differences in price dynamics across retail chains, even for identical products, offer the opportunity to provide new insights into the determinants of price transmission. Specifically, we highlight the role of strategic complementarity and mark-up elasticities as the factors underpinning price transmission. Using supermarket data on a sample of orange juice and coffee products from the seven largest retail chains in the UK, the results show that ignoring strategic complementarity exerts a positive bias on the estimation of price transmission and hence overstates the importance of input costs in price setting. In contrast to recent research, private label products are found to exhibit consistently lower levels of price transmission (higher mark-up elasticity) than national brands, likely reflecting the context of competition in UK food retailing. The focus on mark-up elasticities points to links between the frequency of price adjustment and competition as determinants of price transmission.