Since the advent of the internet in the early 1990s, many manufacturers and retailers have adopted it as part of their multichannel strategy and have devoted considerable amounts of resources to building the online channel. Many consumers have adopted the internet as an important shopping venue. The increasing importance of the Internet has attracted researchers from various disciplines. However, empirical findings with actual data on the effect of the Internet on price competition and consumer price sensitivity are mixed, even for physically identical products such as books and CDs. Moreover, most of these studies deal with nongrocery items, which have very different purchase cycles, repeat purchase rate, and online competitive environment from grocery items. More importantly, none of the existing studies compare the same individuals’ price sensitivity across online and offline shopping channels. Chu, Chintagunta and Cebollada (2008) studies whether the same consumers exhibit different price sensitivities when they shop online versus when they shop offline. Since consumer price sensitivity directly affects a firm’s pricing strategy and profits, an empirical understanding of consumers’ price responses across these two different shopping media will help firms better price their products for different channels and thus earn higher profits.

The authors observe the same households that shop interchangeably in the online and offline stores of the same chain for grocery items. They find that, across 12 vastly different product categories, these households exhibit lower price sensitivities when they shop online than when they shop offline. The analysis accounts for observed and unobserved household heterogeneity as well as price endogeneity. The result holds for large basket-share categories and small basket-share categories, for consumer packaged goods and nonpackaged goods, for categories that are more likely to be purchased online because of their bulkiness or heaviness, and for categories that are more likely to be purchased offline due to their “sensory” nature. They also find household price sensitivities are closely related to household demographics and inversely related to how far the households are located from offline stores. The authors discuss the reasons for the lower online price sensitivity and the implications of the research findings for the retailer’s pricing policies.