Zone Pricing in Retail Oligopoly

Abstract

We quantify the welfare effects of zone pricing, or setting common prices across distinct markets, in retail oligopoly. Although monopolists can only increase profits by price discriminating, this need not be true when firms face competition. With novel data covering the retail home improvement industry, we find that Home Depot would benefit from finer pricing but that Lowe’s would prefer coarser pricing. The use of zone pricing softens competition in markets where firms compete, but it shields consumers from higher prices in markets where firms might otherwise exercise market power. Overall, zone pricing produces higher consumer surplus than finer pricing discrimination does.

Keywords: Zone pricing, Market segmentation, Price discrimination in oligopoly, Micromarketing, Retailing

JEL Classification: C13, L61, L20, L67, L81