Quantitative Marketing and Economics, 1, 111–147, 2003. # 2003 Kluwer Academic Publishers. Manufactured in The Netherlands. Balancing Profitability and Customer Welfare in a Supermarket Chain PRADEEP K. CHINTAGUNTA* University of Chicago, Graduate School of Business, 1101 E. 58th Street, Chicago, IL 60637, USA Email: pradeep.chintagunta@gsb.uchicago.edu JEAN-PIERRE DUBE ´ Graduate School of Business, University of Chicago, 1101 East 58 Street, Chicago, IL 60637 E-mail: jdube@gsb.uchicago.edu VISHAL SINGH Graduate School of Industrial Administration, Carnegie Mellon University, Schenley Park, Pittsburgh, PA 15213 E-mail: vsingh@andrew.cmu.edu Abstract. We investigate the impact of price discrimination by a large Chicago supermarket chain. First we measure the impact of the chain’s current zone-pricing policy on shelf prices, variable profits and consumer welfare across its stores. Using the chain’s database to simulate a finer store-specific micro- pricing policy, we study the implications of this policy on profits and welfare. We show how a store-pricing policy that is constrained to offer consumers at least as much surplus as a uniform chain wide pricing policy still enables the retailer to generate substantial incremental profits. To ensure our pricing problem exhibits a well-defined optimum, we use the parsimonious, mixed-logit demand function that allows for flexible substitution patterns across brands and also retains a link to consumer theory. We discuss the issue of price endogeneity when estimating the demand parameters with weekly store-level data. Standard instrumental variables techniques used to account for such endogeneity also seem to increase the magnitudes of own-price elasticities thereby offsetting the problem encountered by previous researchers of predicted prices from a demand model exceeding those in the actual data. Key words. price discrimination, customer welfare, demand modeling JEL Classification: D12, D4, L81, M3 1. Introduction In recent years, the practice of ‘‘zone pricing’’ has become increasingly popular for retailers. Under this form of third-degree price discrimination a firm selects various delivered prices and the geographic zones in which they apply. In some instances, the definition of a zone may be sufficiently narrow that nearby outlets of a common *Corresponding author.