Poster Title

Stackelberg Price Competition in the Organic Food Market

Grade Level at Time of Presentation

Senior

Institution

Murray State University

KY House District #

5

KY Senate District #

1

Department

Department of Economics and Finance

Abstract

Recent trends in the organic food market has been for generic brands to enter, evidenced in Wal-Mart and Target offering store-brand organic lines which are in direct competition with Whole Foods, the original market leader in organic food. Additionally, contemporary marketing research has found millennials are more likely to purchase organic food as a signal of their concern for the environment. Such research would lead one to expect brand name organics to have considerable pricing power due to this signaling effect. However, on the rational, economics side of things, there is the Stackelberg model which says that in sequential price games, the second mover has an advantage over the first mover, because the first mover’s price is essentially a fixed target for any second-mover in the market to undercut. This study explored whether the reality of the organic food market matched what economic theory predicted, or if the marketing power of brand name organics helped them maintain higher profits after entry by generic brands. After gathering data on the profits of Whole Foods before and after the entry of Wal-Mart and Target, a sequential price game model was applied to observe whether the profits of Whole Foods decreased over time once Target and Wal-Mart entered the market.

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Stackelberg Price Competition in the Organic Food Market

Recent trends in the organic food market has been for generic brands to enter, evidenced in Wal-Mart and Target offering store-brand organic lines which are in direct competition with Whole Foods, the original market leader in organic food. Additionally, contemporary marketing research has found millennials are more likely to purchase organic food as a signal of their concern for the environment. Such research would lead one to expect brand name organics to have considerable pricing power due to this signaling effect. However, on the rational, economics side of things, there is the Stackelberg model which says that in sequential price games, the second mover has an advantage over the first mover, because the first mover’s price is essentially a fixed target for any second-mover in the market to undercut. This study explored whether the reality of the organic food market matched what economic theory predicted, or if the marketing power of brand name organics helped them maintain higher profits after entry by generic brands. After gathering data on the profits of Whole Foods before and after the entry of Wal-Mart and Target, a sequential price game model was applied to observe whether the profits of Whole Foods decreased over time once Target and Wal-Mart entered the market.