When should grocery stores adopt time‐based pricing? Impact of competition and negative congestion externality

Abstract

AbstractConsumers dread shopping during peak hours, and the Covid‐19 pandemic has created additional safety concerns about overcrowding in addition to long waiting times. In view of consumer's congestion aversion, should competitive brick‐and‐mortar grocery stores charge higher prices during congested peak hours to smooth demand? To examine “whether and when” stores should adopt intraday time‐based pricing under competition, we examine a 2‐stage dynamic duopoly game. At the beginning of each stage, each store can make an irreversible decision to adopt time‐based pricing by setting the peak‐hour and normal‐hour prices. We also endogenize consumer's shopping decisions (i.e., when and which store to shop) by incorporating the issue of negative congestion externality. Our equilibrium analysis reveals that time‐based pricing is always beneficial for the stores, and both stores would adopt it eventually in equilibrium. As such, only two equilibria can sustain: either both firms adopt time‐based pricing immediately in stage 1, or only one firm adopts in stage 1 while the other postpones its adoption until stage 2. Interestingly, due to the competitive dynamics, it is less likely for both firms to adopt immediately when consumers are more averse to congestion. Moreover, although the adoption of time‐based pricing leads to differentiated price competition, it can “soften” price competition, causing both peak‐hour and normal‐hour prices to rise above the status quo equilibrium uniform prices. We find that time‐based pricing can always induce demand smoothing and reduce congestion. Although time‐based pricing creates value for the stores (through higher prices), it offers no benefit to consumers.