Raise Prices or Keep Customers?IF ONLY THE CHOICE WERE THAT SIMPLE: A BIG DATA STUDY FINDS THAT RETAILERS SOMETIMES DON'T HAVE ENOUGH INFORMATION TO DEAL WITH CURRENCY VARIATIONS
How do retailers adjust their prices when faced with dramatic currency fluctuations? The answer is given in an ongoing project by Anatoli Colicev, Assistant Professor at the Department of Marketing, with Joep Konings (University of Liverpool Management School) and Joris Hoste (KU Leuven). They have engaged in a two year big data analysis project on Currency Shocks in Emerging Markets: How Does Supplier and Consumer Demand Find Equilibrium?.
They turned their attention to Kazakhstan where in 2015 the government devaluated the Tenge overnight and with no announcement, cutting its value by 30% and on an annual basis by more than 50%. These currency shocks have caused uncertainty about the optimal price setting. Do you pass-on the currency shock to consumers by charging higher prices or do you keep prices stable not to lose customers? “We collected daily product label data from one of the largest supermarket chain in Kazakhstan over many years and for different stores. They amount to more that 30 million data points”, professor Colicev says. “We have also collected data on the prices charged by suppliers, because the retailers sell in Tenge, but they buy products in different currencies, primarily in US Dollars, Euros and Russian Rubles”.
It turns out that the retailers adjusted the price of some products quite frequently, sometimes on a daily basis, to test consumers’ response. But for other products they did not adjust their prices. So, they took into account that consumers are more responsive to price changes for some products, like gadgets you do not really need, while for other products consumers were not very responsive to price changes, like basic food, which is a necessity. But there were many products for which the retailers did not extract enough knowledge from the data and they ended up using an inefficient trial-and-error approach.
“The economic theory argues that firms engage in full rational behavior and therefore they adjust their prices correctly. This is not always the case. We also observed differences based on the store location: the closest to the border had better negotiating power with suppliers”. The overall aim of the project, that will develop in a two-year span and will generate multiple papers, is to understand the evolution of consumer prices in different countries under macroeconomic shocks. The authors will also investigate the behavior of retail companies in Turkey, Russia, and Germany.
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