Reference no: EM133515947

While there is a degree of differentiation between major grocery chains like Albertsons and Kroger, the regular offering of sale prices by both firms for many of their products provides evidence that these firms engage in price competition. For markets where Albertsons and Kroger are the dominant grocers, this suggests that these two stores simultaneously announce one of two prices for a given product: a regular price or a sale price. Suppose that when one firm announces the sale price and the other announces the regular price for a particular product, the firm announcing the sale price attracts 1,000 extra customers to earn a profit of $5,000, compared to the $3,000 earned by the firm announcing the regular price. When both firms announce the sale price, the two firms split the market equally (each getting an extra 500 customers) to earn profits of $2,000 each. When both firms announce the regular price, each company attracts only its 1,500 loyal customers and the firms each earn $4,500 in profits.

If you were in charge of pricing at one of these firms, would you have a clear-cut pricing strategy? If so, explain why. If not, explain why not and propose a mechanism that might solve your dilemma. (Hint: Unlike Walmart, neither of these two firms guarantees "Everyday low prices.")