Abstract
This dissertation examines how supermarkets modify their pricing strategies and promotional activities during periods of sustained inflation. Through a comprehensive literature synthesis, the study analyses empirical evidence from multiple international contexts, including the United Kingdom, United States, Colombia, and China, to understand the mechanisms through which food retailers respond to inflationary pressures. The findings reveal that supermarkets do not implement uniform price increases across product ranges; rather, they adopt state-dependent pricing approaches, adjusting prices more frequently where product-level cost volatility is highest. Furthermore, retailers strategically reduce or reconfigure promotional activities during inflationary periods, particularly curtailing short-term discounts to protect profit margins and manage inventory risk. The research demonstrates significant differences between everyday-low-price and high-low promotional format retailers in their price adjustment behaviours. Evidence from the COVID-19 pandemic illustrates how promotional reductions can themselves contribute to temporary inflation spikes. These findings have important implications for competition policy, consumer welfare, and monetary policy transmission, whilst highlighting the need for continued research into retailer pricing behaviour during economic turbulence.
Introduction
Sustained inflation presents significant challenges for food retailers operating within highly competitive markets characterised by thin profit margins and price-sensitive consumers. Understanding how supermarkets adjust their pricing strategies and promotional activities during inflationary periods has become increasingly important, particularly following the unprecedented economic disruptions witnessed during the COVID-19 pandemic and subsequent cost-of-living crises affecting households globally.
The supermarket sector occupies a critical position within modern economies, serving as the primary interface between food supply chains and household consumption. In the United Kingdom alone, grocery retail accounts for approximately £200 billion in annual sales, with the sector employing over three million individuals directly and indirectly (Office for National Statistics, 2023). Consequently, pricing decisions made by major supermarket chains have profound implications for household budgets, particularly affecting lower-income consumers who allocate proportionally larger shares of their expenditure to food.
From an academic perspective, supermarket pricing behaviour provides a compelling case study for understanding price rigidity, pass-through mechanisms, and the transmission of monetary policy to consumer prices. Traditional economic theory suggests that competitive pressures should result in relatively rapid price adjustments following cost changes; however, empirical evidence consistently demonstrates significant heterogeneity in pricing behaviour across retailers, product categories, and economic contexts.
The practical significance of this research extends to multiple stakeholder groups. Policymakers require accurate understanding of retail pricing dynamics to forecast inflation trajectories and design appropriate interventions. Competition authorities must assess whether pricing behaviours during inflationary periods reflect legitimate commercial responses or potentially exploitative practices. Consumers benefit from understanding how promotions function strategically, enabling more informed purchasing decisions.
This dissertation synthesises contemporary research evidence to provide a comprehensive analysis of supermarket pricing strategies during sustained inflation. By examining evidence from diverse geographical contexts and economic circumstances, the study aims to identify consistent patterns whilst acknowledging important contextual variations in retailer behaviour.
Aim and objectives
Aim
The primary aim of this dissertation is to critically analyse how supermarkets modify their pricing strategies and promotional activities in response to sustained inflationary pressures, drawing upon international empirical evidence to identify common patterns and strategic approaches.
Objectives
To achieve this aim, the following specific objectives guide the research:
1. To examine the theoretical frameworks explaining supermarket pricing behaviour and their relevance during inflationary periods.
2. To analyse empirical evidence regarding the frequency, magnitude, and selectivity of price adjustments made by supermarkets during sustained inflation.
3. To investigate how promotional strategies, including depth, duration, and frequency of discounts, change in response to inflationary pressures.
4. To compare pricing responses between different retail formats, specifically everyday-low-price and high-low promotional strategies.
5. To evaluate the implications of supermarket pricing behaviour during inflation for consumers, suppliers, and policymakers.
6. To identify gaps in current understanding and propose directions for future research.
Methodology
This dissertation employs a systematic literature synthesis methodology to analyse existing research evidence concerning supermarket pricing behaviour during inflationary periods. This approach is particularly appropriate given the substantial body of empirical research available and the need to integrate findings from diverse methodological approaches and geographical contexts.
Literature search strategy
The literature search encompassed peer-reviewed academic journals, working papers from recognised research institutions, and reports from governmental and international organisations. Primary databases searched included Web of Science, Scopus, EconLit, and Google Scholar. Search terms combined variations of key concepts including “supermarket pricing,” “grocery inflation,” “promotional strategies,” “food retail,” and “price rigidity.”
Inclusion and exclusion criteria
Studies were included if they: (a) examined pricing or promotional behaviour in food retail contexts; (b) provided empirical evidence from recognised methodological approaches; (c) were published in peer-reviewed outlets or by reputable research institutions; and (d) were available in English. Studies were excluded if they focused exclusively on non-food retail, lacked empirical foundation, or appeared in non-peer-reviewed sources of uncertain quality.
Analytical approach
The synthesis followed a thematic analysis framework, organising findings according to key dimensions of pricing strategy: price adjustment frequency and magnitude, promotional depth and duration, format-specific behaviours, and strategic motivations. Where studies employed comparable methodologies or examined similar contexts, findings were compared to identify consistent patterns and important variations.
Limitations
Several limitations constrain the methodology. First, reliance on existing literature means that certain geographical regions or retail formats may be underrepresented. Second, methodological heterogeneity across studies complicates direct comparison of effect sizes. Third, the rapidly evolving nature of retail markets means some findings may not fully capture contemporary dynamics. These limitations are acknowledged throughout the analysis, and conclusions are drawn with appropriate caution.
Literature review
Theoretical foundations of supermarket pricing
Understanding supermarket pricing behaviour during inflation requires engagement with several theoretical perspectives from economics and marketing. Menu cost theory, developed by Mankiw (1985) and subsequently refined by numerous scholars, suggests that firms face costs associated with changing prices, including physical costs of relabelling and potential consumer alienation. These costs create price rigidity, with firms adjusting prices only when benefits exceed adjustment costs.
State-dependent pricing models extend this framework by recognising that price adjustment decisions depend upon the state of relevant economic variables rather than occurring at fixed intervals. Karadi et al. (2023) demonstrate that supermarket price setting is fundamentally state-dependent, with prices adjusted more frequently when product-level costs or demand become more volatile. This contributes to more flexible and volatile food inflation, particularly evident in the United States compared with the euro area.
Customer-based theories emphasise that pricing decisions reflect strategic considerations regarding consumer perceptions and competitive positioning. Retailers must balance margin protection against maintaining customer loyalty and competitive market share. Promotional activities serve multiple strategic functions beyond simple price reduction, including traffic generation, inventory management, and competitive signalling.
Price adjustment patterns during inflation
Empirical evidence consistently demonstrates that supermarkets do not respond to sustained inflation through uniform across-the-board price increases. Rather, they adopt selective, product-specific approaches to price adjustment. Research examining supermarket scanner data reveals significant heterogeneity in adjustment frequency across product categories, with prices for some items remaining stable for extended periods whilst others adjust frequently.
For perishable foods specifically, inflation creates complex optimisation challenges. Huang, Yang and Wang (2021) demonstrate that inflation leads retailers to lengthen replenishment cycles, reduce overall sales volumes, and adjust optimal prices downward in present-value terms when time value of money and rising future costs are considered. This counterintuitive finding reflects the interaction between inventory holding costs, spoilage risk, and inflation expectations.
Microdata from Colombian supermarkets provide detailed insight into the temporal dynamics of price adjustment. Giulietti, Otero and Waterson (2020) find significant price rigidities, with reference prices adjusting approximately every three months and costs passing through even more slowly, at roughly five-month intervals. This gradual pass-through implies that inflationary shocks take considerable time to fully manifest in consumer prices, with important implications for monetary policy transmission.
Format-specific pricing behaviours
A crucial distinction exists between retailers employing everyday-low-price strategies and those utilising high-low promotional formats. Everyday-low-price chains promise consistent pricing, minimising the need for consumers to monitor promotional cycles. High-low chains offer regular prices interspersed with temporary deep discounts, creating incentives for strategic shopping behaviour.
Ellickson and Misra (2008) establish that these format distinctions have profound implications for pricing behaviour during inflationary periods. Everyday-low-price chains adjust prices less frequently, even following large commodity shocks, maintaining their positioning as stable, predictable shopping destinations. High-low chains, conversely, adjust more often and exhibit asymmetric responses to input price rises and falls.
He et al. (2023) extend this analysis by examining how everyday-low-price supermarkets specifically adjust their prices. Their findings confirm that these retailers maintain pricing stability as a core competitive attribute, absorbing cost increases for longer periods before passing them to consumers. This behaviour may reflect strategic calculations that temporary margin compression is preferable to undermining brand positioning.
Promotional dynamics during inflationary periods
Promotional activity represents a particularly dynamic dimension of supermarket response to inflation. Promotions serve multiple functions: attracting price-sensitive consumers, generating store traffic, managing inventory, and competing for market share. During inflationary periods, these functions may conflict with margin protection objectives.
Evidence from the COVID-19 pandemic provides compelling insight into promotional dynamics during supply and demand shocks. O’Connell and Jaravel (2020) document a substantial drop in price promotions at British supermarkets during lockdown periods. Crucially, they demonstrate that this promotional reduction was a primary driver of the temporary grocery inflation spike observed, rather than underlying cost increases. As promotions returned following lockdown easing, grocery inflation moderated correspondingly.
Similar patterns emerged in online grocery channels. Hillen (2020) examines Amazon Fresh pricing during the pandemic, finding fewer prices labelled as promotions whilst overall price levels remained roughly stable. This suggests that promotional designations serve marketing functions beyond simple price communication, with retailers strategically managing promotional labels independent of actual price movements.
Research examining promotional patterns during normal trading conditions provides baseline understanding against which inflationary responses can be assessed. Lan et al. (2021) and Lan, Lloyd and Morgan (2014) find that discount likelihood increases with time since the last promotion, following predictable hazard function patterns. These patterns differ systematically between high-low and everyday-low-price formats and vary across product categories and discount depths.
Strategic reconfiguration of promotions
Beyond simple reduction in promotional frequency, evidence suggests that supermarkets strategically reconfigure their promotional activities during inflationary periods. This reconfiguration involves shifting promotional emphasis towards particular product categories and adjusting the depth and duration of discounts offered.
During high demand or tight supply conditions, retailers pull back on promotions to protect margins and manage stock availability, subsequently re-expanding promotional activity as conditions normalise (O’Connell and Jaravel, 2020; Hillen, 2020). This dynamic adjustment reflects the inventory management function of promotions, which becomes more salient when supply chains face disruption.
Promotions are often shifted toward storable and discretionary items, which exhibit greater responsiveness to discounts and accommodate consumer stockpiling behaviour. Lan et al. (2021) and Watt et al. (2022) document this category-specific promotional targeting. However, such shifts can amplify demand variability and create challenges for suppliers facing unpredictable order volumes.
Research from Chinese supermarket chains demonstrates that promotional characteristics influence effectiveness. Niu et al. (2024) find that deeper, broader, and longer promotions all raise store performance and boost sales of non-promoted items, consistent with loss-leader and basket-building strategies. During inflation, retailers may adjust these promotional dimensions to maintain traffic-generating effects whilst limiting margin erosion on promoted items.
Evidence of opportunistic pricing behaviour
Public discourse during recent inflationary episodes has raised concerns about potential “greedflation” – the possibility that firms exploited inflationary conditions to raise margins beyond cost increases. Academic evidence provides partial support for these concerns, though with important qualifications regarding the locus of such behaviour within supply chains.
Chi and Ziebart (2024) examine inflationary pressures surrounding COVID-19, finding evidence that some food companies raised prices beyond levels justified by cost increases and sustained higher prices even as inflation subsequently eased. However, this opportunistic behaviour appears concentrated more at manufacturer level than store level, reflecting the different competitive dynamics operating at each supply chain stage.
Supermarkets operate in highly competitive environments where excessive price increases risk customer defection to rivals. This competitive discipline likely constrains opportunistic behaviour at retail level more effectively than at manufacturing level, where brand differentiation may provide greater pricing power. Nevertheless, the relationship between retailer and manufacturer pricing decisions during inflationary periods warrants continued scrutiny.
Discussion
Integration of findings with research objectives
The synthesised evidence addresses each research objective, revealing consistent patterns whilst highlighting important contextual variations in supermarket pricing behaviour during sustained inflation.
Regarding the first objective concerning theoretical frameworks, the literature confirms that state-dependent pricing models provide the most appropriate framework for understanding supermarket behaviour. Prices adjust not according to fixed schedules but in response to product-specific cost and demand conditions. This framework explains observed heterogeneity in adjustment frequency across product categories and reconciles apparently contradictory findings regarding pricing flexibility.
The second objective concerning empirical evidence of price adjustment reveals that supermarkets employ selective rather than uniform approaches to price increases. Products experiencing greater cost volatility see more frequent price adjustment, whilst stable-cost items may maintain prices for extended periods. The magnitude of adjustment also varies, with evidence of both incomplete and asymmetric pass-through depending upon competitive conditions and product characteristics.
The third objective regarding promotional strategy changes finds consistent evidence of promotional reduction during inflationary shocks, with subsequent recovery as conditions stabilise. Beyond frequency reduction, retailers reconfigure promotional activities, shifting emphasis toward particular product categories and adjusting discount depths. Importantly, promotional reduction itself contributes to measured inflation, complicating interpretation of price indices during such periods.
The fourth objective comparing retail formats confirms fundamental differences between everyday-low-price and high-low strategies in their inflationary responses. Everyday-low-price retailers maintain pricing stability longer, consistent with their competitive positioning, whilst high-low retailers exhibit greater adjustment frequency and responsiveness to cost changes.
Implications for consumer welfare
The findings carry significant implications for consumer welfare during inflationary periods. Promotional reduction disproportionately affects price-sensitive consumers who rely upon discounts to manage household budgets. When promotions decline, these consumers lose access to temporary price relief, experiencing inflation rates exceeding headline measures based upon regular prices.
The shift of promotional activity toward storable items creates differential impacts across consumer segments. Households with greater storage capacity and liquidity to stockpile benefit disproportionately from remaining promotions, whilst constrained households cannot exploit these opportunities. This dynamic may exacerbate existing inequalities in food purchasing power during inflationary episodes.
Format-specific behaviour creates important choices for consumers. Shopping at everyday-low-price retailers provides greater price stability and reduced need for promotional monitoring, potentially beneficial during inflationary uncertainty. However, high-low retailers may offer greater savings for consumers able to time purchases around promotional cycles.
Implications for competition policy
Competition authorities must grapple with complex questions regarding acceptable retailer behaviour during inflation. The evidence suggests that promotional reduction and selective price adjustment represent legitimate commercial responses to changing cost conditions rather than necessarily anticompetitive practices. However, the persistence of elevated prices following cost normalisation warrants attention, particularly where market concentration limits competitive discipline.
The manufacturer-retailer relationship presents particular challenges. Evidence of opportunistic pricing at manufacturer level suggests that retailer margins may be squeezed during inflation even as consumer prices rise. Competition authorities must therefore examine pricing behaviour throughout supply chains rather than focusing exclusively on retail outcomes.
Implications for monetary policy
Understanding retail pricing dynamics has important implications for monetary policy transmission and inflation forecasting. The significant price rigidities documented, with adjustment lags of several months, suggest that cost shocks take substantial time to fully manifest in consumer prices. Monetary policymakers must account for these lags when assessing inflation trajectories and calibrating policy responses.
The role of promotional activity in measured inflation presents measurement challenges. Standard price indices may not fully capture promotional dynamics, potentially misrepresenting underlying inflation pressures. During periods of promotional withdrawal, measured inflation may exceed underlying cost-driven inflation, risking policy overreaction.
Limitations and critical assessment
Several limitations constrain the conclusions drawn from this synthesis. First, the geographical concentration of available research in developed markets limits generalisability to emerging economies, where retail structures and competitive dynamics may differ substantially. Second, the rapid evolution of retail technology, including dynamic pricing algorithms and personalised promotions, may render some findings from earlier studies less applicable to contemporary practice.
The COVID-19 pandemic provides compelling case study evidence but represents an exceptional circumstance combining demand shocks, supply disruptions, and policy interventions. Caution is warranted in extrapolating pandemic-era findings to more typical inflationary episodes driven primarily by monetary or commodity price factors.
Conclusions
This dissertation has systematically examined how supermarkets modify pricing strategies and promotional activities during sustained inflation, synthesising evidence from diverse international contexts and research methodologies. The findings demonstrate that supermarket responses to inflation are considerably more nuanced than simple across-the-board price increases.
Supermarkets facing sustained food price inflation adjust prices more frequently where product-level volatility is highest, employing state-dependent rather than time-dependent pricing approaches. Format-specific strategies significantly influence pass-through behaviour, with everyday-low-price retailers maintaining pricing stability longer than high-low promotional format competitors.
Promotional activity undergoes significant modification during inflationary periods, with retailers reducing discount frequency, reconfiguring promotional emphasis across product categories, and adjusting discount depths to balance margin protection against competitive positioning. Importantly, promotional reduction itself contributes to measured inflation, complicating both consumer experience and policy interpretation.
The research objectives have been substantially achieved through this synthesis. The theoretical foundations of supermarket pricing have been established, empirical evidence regarding price adjustment patterns has been analysed, promotional strategy changes have been documented, format differences have been compared, and implications for stakeholders have been evaluated.
Future research should address several identified gaps. Longitudinal studies tracking pricing behaviour through complete inflationary cycles would illuminate dynamic adjustment processes. Research examining algorithmic pricing implementation during inflation would update understanding for contemporary retail practice. Comparative studies across emerging and developed markets would enhance generalisability of findings. Finally, research examining consumer behavioural responses to pricing changes would complement supply-side analysis with demand-side perspectives.
The significance of this research extends beyond academic understanding to practical application. Consumers benefit from understanding promotional dynamics and format differences when making shopping decisions during inflation. Policymakers require accurate understanding of retail pricing behaviour for inflation forecasting and intervention design. Competition authorities must distinguish legitimate commercial responses from potentially exploitative practices. By synthesising available evidence, this dissertation contributes to informed decision-making across these stakeholder groups whilst identifying priorities for continued research attention.
References
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