Chapter 3: Retail Demand
An intrinsic feature of retail demand, stressed in the development of the approach in the previous chapter, is that it depends on distribution services. Another intrinsic feature of retail demand, which was not stressed in the previous chapter, is its multiproduct nature. Section 3.1 is an introduction to the household production model. This model provides a natural and rigorous basis for capturing these two fundamental features of retail demand and it is a well established framework in both the economics and marketing literature. Section 3.2 contains the implications of the household production model for the substitutability and complementarity that arises in retail demand as a result of price changes. How these concepts apply to recent empirical marketing literature is shown in section 3.3. The two studies discussed in detail reflect best practice in the marketing literature and allow us to illustrate important implications of this approach to retail demand. More generally, they illustrate how this approach provides a conceptual foundation for the use of scanner data. Section 3.4 details the immediate implications of the household production model for the substitutability and complementarity that arises in retail demand as a result of changes in distribution services. The analysis of these changes relies on the distribution services’ elasticity of demand, which is a concept intrinsic to the approach to retail demand emphasized in this book. Section 3.5 discusses more general and subtle implications of our approach to retail demand, namely implications for retail competition and agglomeration effects. Section 3.6 concludes by explicitly...
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