This study analyzes Wal-Mart’s pricing practices and its influence on competitors’ input cost transmission. Previous attempts to analyze Wal-Mart’s pricing strategy in the United States have been limited by the company’s refusal to provide scanner data to third party research firms such as AC Nielsen. This is the first study to observe Wal-Mart’s prices over an extended period of time. Using weekly-store level price data between 2001 and 2006 that government officials collected in 12 Mexican cities, I find that Wal-Mart adjusts its prices 1/3-3 times slower to wholesale price increases than other retailers and responds 5-7 times faster to wholesale price decreases than its competitors. This evidence is robust to the comparison of Wal-Mart to other hypermarkets that offer “every day low prices” and to potential endogeneity of Wal-Mart’s location choices. All retailers respond asymmetrically to wholesale cost changes. However, retailers other than Wal-Mart respond twice as fast to wholesale price increases than to decreases, while Wal-Mart behaves in the opposite way. I find no evidence that proximity to a Wal-Mart supercenter or the level of competition affects the speed of price adjustment of retailers.
Financial Distress, Competition, and Service Quality in the Airline Industry
This paper analyzes how financial distress and competition influence firms’ strategic decisions of the announcement and delivery of quality. The empirical context is the U.S. commercial airline industry from 1995 to 2001. Service quality is defined as timeliness –measured separately as cancellations and delays- and reported flight length of non-stop domestic flights. Financial distress is computed using three different approaches: Altman’s Z-score, yield spreads on non-callable corporate bonds, and a Black-Scholes-Merton option pricing model. The estimation of the effect of financial distress on airlines’ service quality is carried out in two steps. First, the hypothesis that financially distressed airlines change their scheduling (reporting longer flight times) to obtain a better ranking in consumer reports is tested. I find that air carriers behave in the opposite way, scheduling less time for their flights when they face financial distress. Second, controlling for variables that are beyond the control of airline carriers such as hourly weather conditions and airport congestion, the hypothesis that changes in timeliness are related to financial distress is tested. Financially distressed carriers have more arrival delays for factors that they are responsible for, even controlling for the characteristics of the aircrafts that they schedule. Regarding the relevance of the level of competition at the route and airport level for firms’ decision of the promise and delivery of quality, I find that carriers with greater market share schedule more time for flights and have more arrival delays.
Strategic Pricing During Periods of Peak Demand: Evidence from the Remittances Market
This study analyzes whether price levels and price dispersion fall during periods of peak demand. The empirical context is the market for remittances from the United States to Mexico. I examine weekly prices (fees and exchange rates) of sending $300 from nine U.S. cities to Mexico from 1999 to 2007. This market is an excellent opportunity to study price setting because wholesale costs can be easily determined in terms of the official exchange rate. In addition, this market allows studying peak demand periods with a varying proportion of informed consumers as new immigrants arrive. I find that prices are lowest for Mother's Day when the aggregate level of demand is highest. Price dispersion does not vary significantly although search costs are lower due to information spillovers. Overall, I find support for a theory of loss-leader pricing for both high and low quality products. Firms try to maximize their intertemporal reputation in a context of significant search costs for consumers. Banks which offer financial products other than remittances, incur a more aggressive loss-leader strategy. Regarding the proportion of informed consumers which should influence price dispersion models, firms set lower prices when temporal migration is high. Price dispersion does not vary significantly during this period. Prices are higher right after payday, when demand is higher, but search costs and the proportion of informed consumers do not change.