How Markets Clear Without Prices? Service Time in Online Grocery (joint with Itai Ater)

Abstract:

We study how firms that set identical prices in different local markets respond to changes in competition and demand conditions. Focusing on the online grocery market in Israel and using 3.5 years of bi-weekly price and service time data, we first show that online grocers set identical prices in different markets, and offer shorter service times in more competitive markets, on low-demand/low-cost weekdays, and when setting high prices. Next, we exploit regional and temporal variation to examine how incumbents respond to entry by rival online grocers. We find that incumbents significantly reduce service time on low-demand weekdays. The reduction in service time begins shortly before entry, it is greater in monopolistic markets and when entrants pose a larger competitive threat to the incumbent. Moreover, service time falls also in markets that did not experience entry, though served by the same distribution center as markets that experienced entry. We use the newsvendor problem model to rationalize our findings, which illustrate how firms use non-price attributes to compete, and how markets clear when prices are uniformly set across markets.