leader good is used to lure customers into the shop. If significant costs exist for changing stores
to purchase good, a customer may find it rational to buy other goods at the store despite higher
prices for those goods. In this way, potential losses associated with using a loss leader are
compensated and the strategy is rational for the store. Varian (1980) presents a dynamic model
of retail competition with informed and uninformed consumers. Uniformed consumers randomly
choose shops; the informed always visit the lowest price store. Because of high fixed costs,
average costs of retailers are decreasing. For these conditions Varian shows that an equilibrium
strategy is to decide prices randomly based on a U-shaped distribution function. Thus, high as
well as low (sales) prices are chosen most often. Because of specific conditions in food retailing
most models presented so far can a priori be excluded to explain sales for these products. The
products analyzed in this study are fresh foods (fresh meats, fresh vegetables, and fresh fruits)
which cannot be stored over long time intervals (perishable goods). Thus, the inventory-based
models cannot explain the potential occurrence of sales for these products. Fresh foods are
bought by consumers at a high frequency (e.g. weekly), and thereby, consumers will eventually
learn about the low price stores. The specification of the Salop and Stiglitz (1977) and Lazear
(1986) models are inappropriate for this category of goods. The arguments concerning the
introduction of new goods and incentives to spread demand across time are also not relevant in
the market for fresh foods, at least for the products under study. Fresh meats, vegetables, and
fruits are relatively (standardized) homogenous products. The informed and uninformed
consumer model of Varian (1980), however, is supported by survey studies in this field. Results
show that consumers know only to a limited extent the prices of foods in shops they just visited
(see e.g. Gabor and Granger, 1961). Also, the loss leader argument cannot be rejected a priori.
From the Varian model, the following hypothesis can be derived:7 (a) Prices stem from a
continuous distribution, (b) the distribution of prices is U-shaped, (c) sales occur randomly in
time, (d) sales occur randomly between shops, (e) sales lead to lower expenditures for foods.8
3. Data9
The data used for this study are from the “Zentrale Markt- und Preisberichtstelle” (ZMP)
located in Bonn, Germany. Price data is collected for 56 fresh food products by “Melder” (price
reporter). For our study, ten out of the 56 food products sampled by ZMP were selected to create
a sample composed of a full panel. That is, products were selected to ensure that prices were
available over the entire period of observation for each store. Specialized fruit and vegetable as
well as butcher shops were excluded from the sample due to incomplete data. Food products
The loss leader model leads to the opposite hypothesis as the Varian model regarding the impact of sales
on expenditures. If loss leaders are used to lure customers into the shop, total expenditures ought to be not
negatively correlated with the number of sales.
Empirical evidence relevant to this study is limited. Villas-Boas (1995) tested the distribution of prices for
the coffee and saltine cracker markets in the US (Kansas City) based on the hypothesis derived from the
Varian model. His results support in about 50 % of the analyzed price series for saltine crackers and coffee
that the estimated distribution predicted by the Varian model has to be rejected. Pesendorfer (2000)
analyzed the market for ketchup in Springfield Missouri (US). He finds the data to indicate the predicted
path by the model. The duration variables are significant and indicate the predicted sign. Prices and sales
exhibit only little correlation across chains, but are significant for the same chain between different brands.
Hosken and Reiffen (2001) find their main hypothesis to be supported by data for retail prices of peanut
butter and margarine in Sioux Falls (Missouri) and Springfield (South Dakota) in various supermarket
chains. Price changes for the perishable good (margarine) are significantly smaller than for the durable
good (peanut butter) and price changes are negatively correlated.
Prices throughout the paper are quoted in German pennies (Pfennige). One penny is equal to one
hundredth of one German Mark (Deutsche Mark, DM). German Marks were the valid currency in
Germany up to the end of 2001. Since January 2002 the currency has changed to Euro (€). One Euro is
equal to 1.9558 German Mark. SSM, BSM, CSM, DC indicate small, big, and combined supermarkets and
discounter respectively.