Discussion paper

DP16601 How Do Markets Clear Without Price Adjustments? Service Time In Online Grocery

This paper studies how firms use service time to respond to local competition and demand conditions when their prices are uniformly set at the national level. Using comprehensive data collected twice a week over three years from 180 Israeli localities, we first show that online grocers set identical prices in all markets where they operate. In contrast, service times are shorter in more competitive markets, on low-demand/low-cost days of the week, and for deliveries offered by high-priced grocers. Next, we exploit regional and temporal variation in entry decisions to examine how incumbents respond. We find that incumbents reduce service time when facing entry, but only on low-demand/low-utilization days. This reduction begins shortly before entry and is greater in monopolistic markets and when entrants pose a larger threat to the incumbent. Service time falls also in markets that do not experience entry yet are served by a fulfillment center serving markets facing entry. We use the classic newsvendor problem model to explain our findings, and in doing so emphasize the importance of accounting for both competitive and supply-side considerations when analyzing firms' response, particularly when prices are unresponsive.

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Citation

Shany, A (2021), “DP16601 How Do Markets Clear Without Price Adjustments? Service Time In Online Grocery”, CEPR Press Discussion Paper No. 16601. https://new.cepr.org/publications/dp16601