One common situation is for two supermarkets to be competing for the same customers. As we’ve discussed, it’s hard for be systematically more expensive than the others without losing a lot of business, so they will charge similar prices on average, but both will also mix up their prices. That way, both can distinguish the bargain hunters from those in need of specific products, like people shopping to pick up ingredients for a cook-book recipe they are making for a dinner party. Bargain-hunters will pick up whatever is on sale and make something of it. The dinner-party shoppers come to the supermarket to buy specific products and will be less sensitive to prices. The price-targeting strategy only works because the supermarkets always vary the patterns of their special offers, and because it is too much trouble to go to both stores or to order two separate internet deliveries, carefully comparing the price of each good every time we go online. If shoppers could predict what was to be discounted, they could choose recipes ahead of time, and even choose the appropriate supermarket to pick up the ingredients wherever they’re least expensive.
Excerpt from: The Undercover Economist by Tim Harford
