Market disequilibria and their influence on small retail store pricing

In this paper a quantitative model is developed to explain differences in average store price levels. We assume that stores may operate under different economic regimes, that is, under excess capacity or excess demand. Prices are expected to the higher than average in case of an excess demand regime and lower in an excess capacity situation. Actual information regarding the regime that applies to each individual store is not available. Therefore, we propose to use a so-called ‘switching model’ with endogenous regime choice to analyse the store price differences. The model developed in the paper is estimated using four largely differing types of stores from the Dutch retail trade. These samples consist mainly of small stores.