OIS Assoc. Professor JM Song Examines Recent Stop & Shop Controversy
Image by Ed Brennen
02/03/2025
The cost of groceries was top of mind for many Americans in the 2024 presidential election. According to the Associated Press, nearly said they were concerned about how much they were spending in the checkout line.
Between inflation, the threat of tariffs and a bird flu outbreak that has caused egg prices to soar nationwide, supermarket sticker shock persists.
In Massachusetts, a leading grocery store chain recently found itself at the center of a different type of pricing discussion. Stop & Shop, the largest grocery chain in the commonwealth with 115 locations, was found to charge higher prices for certain items at an urban location in Boston compared with a suburban location.聽
In 2023, the Hyde Square Task Force, a nonprofit that works to empower Boston鈥檚 Afro-Latin youth, published a report showing that at a Stop & Shop in Jamaica Plain compared with a Stop & Shop nearly seven miles away in Dedham, Massachusetts.
The report prompted the Massachusetts congressional delegation to send last fall to Ahold Delhaize, the company that owns Stop & Shop, demanding information on the chain鈥檚 pricing algorithms and decision-making processes across store locations.
JM Song, an associate professor of operations and information systems in the Manning School of Business, sat down to share some thoughts on the topic.
Q. Why would a grocery store chain charge different prices for the same items at different locations?聽
A. One possible explanation is 鈥渢hird-degree price discrimination,鈥� which is a pricing strategy where a company charges different prices to different groups of consumers. It鈥檚 the most common form of price discrimination and involves charging different prices to consumers with different demand elasticities. Suppose Stop & Shop sells the same goods in a high-income town and a low-income town. Previous literature has found that unhealthy foods are generally less attractive to high-income consumers, who may be willing to pay more for healthier foods at other organic grocery stores in town, such as Whole Foods. To attract these customers, Stop & Shop could offer lower prices in high-income towns than they do for the same products in low-income towns.聽
Q. Are some grocery store items more ripe for price changes?
A. Price elasticity is a measure of the change in demand for a product due to a change in its price. Thus, a high price elasticity means that demand changes significantly with price fluctuations, and the common examples are luxury items and consumer discretionary items such as branded cereal or chocolate bars. On the other hand, a low price elasticity means that demand doesn鈥檛 change significantly with price fluctuations, and the common examples are essential goods such as bread and milk. Thus, in general, the company could charge a different price for the higher price elasticity product to maximize its profits.聽
Q. Do operational costs play a role in price discrepancies?聽
A. Stores have to take into account various factors relating to operating expenses, such as rent, labor costs and store size, and it's normal for them to vary. But that鈥檚 only half of what determines the final price 鈥� the supply side. The other half comes from the demand side, which can be a customer鈥檚 willingness to pay and competition from other grocery stores in the same market.聽
Q. What kind of impact does inconsistent pricing have on a community?鈥�
A. Communities that are charged more than other communities may feel that they are being ripped off by the company鈥檚 price gouging. This could have a negative impact on the health of the community, as well as on customers' perception of the brand in the long term.聽
Q. Are certain communities more likely to experience higher grocery store prices?鈥�
A. On the supply side, if the grocery chain has only a few stores in the area, it can鈥檛 take advantage of economies of scale in maintaining those stores, so it has to pay higher operating costs (e.g. inventory costs, food transportation costs, etc.), and this can lead to higher retail prices for customers. On the demand side, if there aren't many other grocery stores in the community, the customer鈥檚 choice is limited. The company could then enjoy a monopoly position and charge higher prices to customers because it has more control over pricing than other communities. In addition, studies have shown that healthier foods are generally more expensive than unhealthy foods, particularly in food deserts where access to nutritious food is limited. In these areas, economic barriers and the unaffordability of nutritious food for low-income people could become major problems in a society.聽