American Journal of Industrial and Business Management, 2013, 3, 687-699
Published Online December 2013 (http://www.scirp.org/journal/ajibm)
http://dx.doi.org/10.4236/ajibm.2013.38078
Open Access AJIBM
687
Using Relative Utility Pricing to Explain Multibuy Prices
in Supermarkets and on the Internet
Philip Thomas1, Alec Chrystal2
1School of Engineering and Mathematical Sciences, City University London, London, UK; 2Cass Business School, City University
London, London, UK.
Email: pjt3.michaelmas@gmail.com
Received October 20th, 2013; revised November 20th, 2013; accepted November 27th, 2013
Copyright © 2013 Philip Thomas, Alec Chrystal. This is an open access article distributed under the Creative Commons Attribution
License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
In accordance of the Creative Commons Attribution License all Copyrights © 2013 are reserved for SCIRP and the owner of the
intellectual property Philip Thomas, Alec Chrystal. All Copyright © 2013 are guarded by law and by SCIRP as a guardian.
ABSTRACT
The Relative Utility Pricing (RUP) model is used to explain the prices for commodities being sold in supermarkets and
on the internet. Grocery prices offered by the supermarkets, Tesco, Sainsbury and Waitrose in December 2009 and Au-
gust 2013, are considered, as well as the prices of electronic items offered by Amazon on the internet at the same dates.
The obser v ed pr ice for a pack can be give n an ex planation in te rms of its size relative to the smallest pack considered by
the customer (the baseline pack), the price and variable cost associated with the baseline pack and the demand density.
The optimal price may be predicted using a profit maximising calculation if these data are available. Even if the ven-
dor’s knowledge of the demand density is poor or non-existent, it is still possible for a vendor knowing his unit variable
cost to calculate a useful approximation to the profit-maximising price by using a uniform or Rectangular demand den-
sity to represent customer demand. Alternatively, if there are no independent data on the demand density but the prices
of the packs are available, it is possible to determine the approximate shape of the demand density leading to those
prices. This demand density will then indicate whether the demand is soft or hard, with the Rectangular distribution
indicating a neutral market. We consider the vendor to be a large retailer, such as a supermarket, who can obtain the
product that he wishes to sell from a variety of suppliers at constant per-unit variable cost and hence marginal cost. Any
sales at a price above marginal cost will contribute to profit. The RUP model provides an approximate match to the
prices observed for supermarket milk and eggs by adjusting the demand density. A softening of the market for farm
retail commodities is revealed between December 2009 and August 2013, fully consistent with the co incident long pe-
riod of low growth and falling real wages in the UK economy. It is sh own how the vendor may use product differentia-
tion to buck this trend. The RUP model explains also the current prices of USB memory sticks, how those prices have
evolved and how they are likely to evolve over time.
Keywords: Relative Utility Pricing; RUP; Packs of Different Sizes; Pricing Strategies; Product Differentiation; Utility
Theory
1. Introduction
The Relative Utility Pricing (RUP) model, devised to
explain quantity promotions such as Buy One Get One
Free [1], will be used to predict the prices for commodi-
ties being sold in supermarkets and on the internet. The
paper will consider milk and egg prices offered by the
UK supermarkets, Tesco, Sainsbury and Waitrose in De-
cember 2009 and August 2013. The prices of electronic
components will also be analyzed, specifically universal
serial bus (USB) memory sticks of different capacity.
The method used to examine these prices will differ
from that presented in Section 8 of [1], which was con-
cerned with the “design” problem of choosing the size
and price of pack 2 from the three options: 1) “buy one
get one free”; 2) “2 for the price of 1” or 3) Golden Ratio.
Customers’ behaviour was then modelled using the Sin-
gle Comparison Relative Utility Pricing (SCRUP) model.
The task addressed in this paper is the “operational”
problem of deciding on the best prices for a set of packs
once their size has been fixed. This brings in the need to
respond with price changes to alterations in consumer
Using Relative Utility Pricing to Explain Multibuy Prices in Supermarkets and on the Internet
688
attitudes over time.
The structure of the RUP model allows a determina-
tion to be made of both the minimum price and the
maximum price, maxn, that potential purchasers may
assign to a pack of a given size, pack n. It is shown in [1],
Appendix B, that the MAP for every individual in the
cohort of consumers targeted by the retailer will fall
within the range to
p
1n
p
1
Lnp, where n is the
price of pack n and is the “largeness” of pack n,
the ratio of its size to the size of the entry-lev el p ack 1, so
that .
p
Ln

11L
Once the range of possible prices has been identified,
as well as a mechanism for different individuals assign-
ing different values within that range to their maximum
acceptable price (MAP), as identified in Section 6 of [1],
the final unknown is the probability d istribution for MAP,
the “demand density” (see [2] and [3] for a discussion of
this concept). If the demand density for each pack size,
, can be found independently, perhaps by a cus-
tomer survey, then the RUP model will be able to give
good price predictions for all the pack sizes larger than
the entry-level pack, pack 1, g i ven the pri ce of pac k 1.
1n
In the absence of independent data on demand density,
it is nevertheless possible to calculate, at least approxi-
mately, the form of the demand den sity that is needed for
the observed prices to generate the optimal profit for the
vendor. The shape of the demand density curve then pro-
vides an easily understood explanation for the observed
prices—for example, is the market hard or soft? This
gives the RUP model the power to explain pack prices,
which is the principal aim of this paper.
The restriction on a probability distribution, namely
that the area under the curve must be unity, proves help-
ful in restricting the number of possible demand scenar-
ios needing exploration before a reasonable set of results
can be obtained. It is thus possible to vary the parameters
of the generalised Double Power demand density, the
properties of which are derived in [3], to find the profit-
maximising prices that give the best match to the ob-
served prices.
2. The Probability Distribution for MAP for
Pack n
As just noted, the upper and lower limits are defined for
the probability distribution for MAP for pack n, but the
form of the demand density within those limits remains
open, subject to the general but important condition that
its integral will be unity. This problem is addressed in
this paper throu gh the u se of two prob ability distribution s
with claims to generality. The first is the Uniform or
Rectangular distribution, often used in statistics wh en it is
known that some random distribution will be valid but
lack of data makes it impossible to specify the actual
form. The second is the generalised, Double Power den-
sity, discussed at length in [3], where the mode can be placed
anywhere within the range by the appropriate variation of
parameters. In fact, the Double Power density can be ar-
ranged to give a good approximation to the Rectangular
distribution by choosing its parameters appropriately.
One might reasonably expect that the fraction of the
potential consumers of pack n prepared to pay a price of
1
Lnp or close to it will become rather small as n and
hence
Ln increase. Moreover, the market for large
packs may lose its strong link to the market for small
packs. Hence when n is large, it may be sensible to as-
sume that the prospective purchaser of pack n will make
comparisons only with packs that are reasonably close to
pack n in size. This will involve rebasing, so that the
smallest non-empty pack with which the customer makes
a comparison is pack r. 1r
implies that pack n is be-
ing compared with each and every non-empty pack be-
low it, while implies that the prospective pur-
chaser is now ignoring the existence of all packs between
pack 0, the empty pack corresponding to no purchase,
and pack r, the first non-empty pack that he might be
interested in purchasing. Hence packs 1,
1r
2,,1r
are
disregarded.
3. Setting the Price of Pack n so as to
Maximise Profit
By contrast with Section 9 of [1], which was concerned
with selecting both the size and the price of pack 2 given
the size and price of pack 1, now the sizes of the various
packs, , are fixed, and the problem is to select
optimal prices for the larger packs, given the price of
pack 1. The vendor will be faced with customers with
expectations conforming to the RUP model, and will
need to adjust his prices to take account of those expecta-
tions.
2,3, ,n
It is assumed that the total variable cost of the good
will be proportional to the amount of the good sold, irre-
spective of the size of the pack or packs in which the sale
is made. Let 1v be the variable cost per pack for pack 1,
assumed constant. Hence selling a single pack 1 will in-
cur a total variable cost, 1v, selling two packs 1 will
incur a total variable cost of 1 and so on. Moreover,
if pack 2 h as a largeness of 2, viz. , then it will
incur a total variable cost of 1v, while if it has a large-
ness of 3, viz.
c
c
2
2v
c
c

22L
23L
, then pack 2 will incur a total
variable cost of 1, and so on. Hence, in general, the
variable cost per pack, , for pack n will be
3v
c
vn
c
1vn v
cLnc (1)
With the contents of pack 1 seen as the fundamental
unit of measurement, viz. , the variable cost per
pack, , for pack 1 may be seen as the variable cost

1L1
1v
c
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Using Relative Utility Pricing to Explain Multibuy Prices in Supermarkets and on the Internet 689
incurred in selling each one of these fundamental units.
The achieved price, 1, of pack 1 is ex ogenous to the
RUP model, and this makes it convenient to express
in terms of :
p
1v
c
1
p
11vvf
ccp1
(2)
Here 1vf is the fraction of the achieved price, 1, of
pack 1 absorbed by variable costs. Substituting from
Equation (2) into Equation (1) gives the variable cost per
pack for pack n, expressed in terms of pack 1 price, :
cp
1
p

11vn vf
cLncp (3)
Let the probability density for the MAP, n, for pack
n be p

n
g
p
p
. Using the concept of the “uniconsumer”
introduced without loss of generality in [2] to character-
ise a person prepared to buy one but only one item if the
price is right, the fraction of the uniconsumers prepared
to pay n or more for a single pack n will be
n
Sp ,
given most generally by

 
0
d1 d
n
n
p
np
Spgv vgv v


(4)
Since the target group consists of consumers prepared
to pay between 1n and ma for pack n, pxn
p
0
n
gp
for 1nn
(as well as for ). Hence Equa-
tion (4) may be rewritten:
pp
maxnn
pp


1
1
n
n
p
np
Spgv v

d (5)
We may define an “offset MAP”, , for pack n by:
n
q
1nnn
qpp
 (6)
which will conform to a probability distribution,
n
hq ,
over the interval max , where, since
from Appendix B of [1], the maximum
value of the offset MAP, , for pack n, is given by
0nn
qq
n
q

max 1n
pLnp
n

max1 1n
qLnpp
 (7)
We may also note that differentiating Equation (6)
gives
d1
dn
n
q
p (8)
The probability dens ity for MAP,

n
g
p, and that for
offset MAP, , which may be termed “demand
densities”, are then linked by:

n
hq
 
d
dn
nn
n
q
n
g
phqhq
p
 (9)
in which Equation (8) is used. Substituting from Equa-
tion (9) into Equation (5) gives:



0
1d
n
q
nn
Sphv vSq 
(10)
Let there be N uniconsumers in the target group. The
vendor’s total pro fit,
, from selling packs n will be his
total income from packs n less both the total variable
costs and the fixed costs,
F
n
C, associated with packs n:

nnnvn F
NS ppNS pcC n
(11)
This may be converted using Equations (3), (6) and (10)
into the form:


111nn nnvfF
NSqqpNSqcLnpC
 n
(12)
The retailer will seek to maximise this profit, which,
for a constant size of target population, N, is equivalent to
choosing the offset MAP, , so as to maximise the av-
erage profit per consumer, n
q
:




111 0
1d
n
q
F
n
nvf n
N
C
qcLnpp hvvN

 



(13)
in which Equation (10) has been used in the second step.
The term, Fn
CN, being a constant, is unaffected by
changes in n, and so, given a demand density, q
n
hq ,
it is possible by direct computation to find the value of
that will maximise
n
q
, where




111 0
1
n
q
nvf n
qcLnpp hvv

 



d
(14)
which will also maximise
.
Alternatively, the maximising value of MAP may be
found by differentiating Equation (13) with respect to the
offset MAP, , and then setting to zero the resultant
expression, n
q
dd 0qn
. This gives the optimal price
for pack n as 1nnn
pqp
, where is the solution
of n
q
 



111
0
1d
n
q
nvfn n
hvvqc Lnpphq
0
 
(15)
4. Explaining the Price of Pack n
Data are available in the supermarket or on the internet
for the achieved prices, 12 , of packs of vari-
ous sizes, and we selected for examination the pricing of
fresh milk and eggs in supermarkets and USB memory
sticks on the internet, specifically those offered for sale
on Amazon.co.uk.
,,,
n
pp p
The supermarkets considered were Tesco, Sainsbury
and Waitrose. Tesco is the UK’s leading supermarket,
with a market share of about 30%. Sainsbury has about
16% of the market, while Waitrose, a part of the pri-
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Using Relative Utility Pricing to Explain Multibuy Prices in Supermarkets and on the Internet
690
vately owned John Lewis Partnership, has about 4% of
the market. John Lewis, together with its subsidiary,
Waitrose, is widely regarded as an up-market retailer.
Data were available on the variable cost per pack for
pack 1, 1v, in the case of both milk and egg s, but not on
the demand density. No information was available on the
variable cost of a USB memory stick, nor on its demand
density.
c
The Rectangular demand density, if it were to be valid,
confers the advantage that it is defined by the RUP model
as soon as data are available on the pack largenesses and
the prices of packs below pack n, 12 1
,,,
n
pp p
:

 
11
11
1 if
0 otherwise
nn
n
n
ppLn
Lnp p
gp

p
(16)
Thus, if the variable cost per pack for pack 1, 1v, is
known (it can be presumed that the vendor will know this
figure), then it is possible to use the Uniform or Rectan-
gular demand density to calculate successively the opti-
mal prices for packs . This distribution de-
pends only on the prices of lower packs and on the
largeness of pack n. It can be applied successively as
soon as the price, 1, of the entry-level pack is known.
Hence it is useful in its own right for a vendor laun ching
a new product to be packaged in a variety of pack sizes at
a time when experience of the market is necessarily
lacking and when whatever market research is available
may be insufficient to establish reliable estimates of the
actual demand densities. More generally, it may provide
useful central estimates for quoted prices when it is not
known whether the market is soft, when the demand den-
sity is biased towards lower prices, or hard, when the
demand density is skewed towards higher prices.
c
2,3, ,n
p
However, the Rectangular demand density is just one
of the possible densities that might be valid. In this study,
therefore, the versatile Double Power demand density
was used to examine a large range of possible offset de-
mand densities. The Double Power demand density,
, characterising the offset MAP, , for pack n is
given by [3]:

n
hq n
q

max
max
for 0
0 for
cd
nnn nn
nn
hqaqbqqq
qq
 

(17)
where a, b, c and d are non-negative constants. The mode
will be strictly interior if all of a, b, c and d are non-zero;
it will occur at the lower boundary, , when
0
n
q0c
,
while it will be located at the upper boundary,
maxnn
, when . The constants, a and b may be
defined in terms of c and d as detailed in [3].
qq0b
For any product sold in packs of different sizes, it has
been assumed that the parameters, c and d, defining the
demand densities will be the same for all of the packs
greater than the effective baseline (pack r + 1 and upwards).
The optimising results from [3] may be used after put-
ting
n
pq (18)
and
11vvf n
ccLnpp

1
(19)
which have the effect of converting Equation (13) into
Equation (3) of [2]. Thus, for example, if the mode is
strictly interior to the interval, , then the opti-
mal value, will be the solution of:
max
0, n
q
*
n
q
 
  
11
**
max max
**
111
maxmax max
12 12
11
0
dc
nn
nn
cd
vf nnn
nn
qq
cd dc
qq
cLnp pqq
cd
qq
dc

 
 
 
 









n
q
(20)
(cf. Equation (67) of [3]).
5. Using the RUP Model to Examine the
Price of Milk in the Tesco Supermarket
Milk is retailed in the UK in 3 main categories: whole
milk, which has a butter-fat content of about 4% [4],
semi-skimmed milk (1.7% butter-fat) and skimmed milk,
with a fat content of about 0.1% [5]. Just about half of the
milk retailed in the UK is whole milk [6], with the re-
maining sales coming from reduced-fat milk. Price data
were taken from the My Supermarket website in De-
cember 2009 [7] and August 2013 [8].
It is usual for supermarkets to offer milk in four dif-
ferent sizes or “packs” in the terminology of this paper: 1
pint (= 0.57 litre), 2 pints, 4 pints and 6 pints. Tesco
prices packs of the same size the same for each category
of milk: whole, semi-skimmed and skimmed.
Estimates of the variable cost per pint may be made
from the information on farm gate prices released by
Tesco and covered in the farming press. These may be
checked using average farm gate prices [4] provided by
the UK Department of Environment, Farming and Rural
Affairs (DEFRA). The price paid to farmers supplying
Tesco was £0.1565 per pint in December 2009 [9] and
£0.1861 per pint in August 2013 [10]. Although super-
markets may offer special promotions on milk, they claim
that this does not affect the price paid to farmers, which
are for long-term contracts [6].
To this must be added the milk processing cost (col-
lection, pasteurization and packaging) estimated at
£0.0675 per pint for semi-skimmed milk [6]. In the ab-
sence of information on how the milk processors incur-
porate into their business model the benefit of selling the
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Using Relative Utility Pricing to Explain Multibuy Prices in Supermarkets and on the Internet 691
skimmed-off butter-fat, it has been assumed that the cost
of £0.0675 per pint applies to whole milk as well as to
semi-skimmed milk. Finally some further variable costs
must be added, such as distribution and stacking at the
different supermarkets, and these are assumed to increase
the total by 10%.
Hence the variable cost of Tesco milk was estimated at
£0.2464 per pint in December 2009 and £0.2790 per pint
in Augus t 2013.
5.1. Whole Milk, August 2013
Table 1 summarises the observed prices in August 2013,
and compares the actual prices with the optimal prices
generated by the RUP model with c = 0 and d = 0.29 (see
Figure 1). These parameters produced the best match to
the prices of packs as judged by the
minimisation of the weighted sum of the squared errors,
, between the observed and predicted prices for
packs :
1,2,,rr n
n

Wr 1,2,,rr
Table 1. Tesco whole milk and semi-skimmed milk, August
2013.
Pack identifier, n cv1, £/pin t 1 2 3 4
Size, pints 1 2 4 6
Largeness, L 1 2 4 6
Price, £ 0.49 0.89 1.3 9 1.99
RUP Double Power
price (£) c = 0,
d = 0.29 0.2790 0.49 0.69 1.38 2.07
RUP Double Power
price (£) (Rebased)
c = 0, d = 1.66 0.2790 - 0.89 1.35 2.02
RUP Rectangular
price (£) 0.2790 0.49 0.77 1.54 2.30
0
1
2
3
4
5
6
7
8
9
10
00.5 11.522.5 3
MAP (£)
Probability densit
Pack 4: 6 pints
Pack 3: 4 pints
Pack 2: 2 pints
Figure 1. Tesco milk, August 2013, c = 0, d = 0.29.

2
,
1
nirupi
ir i
pp
Wr p

(21)
It is assumed first that the 1-pint pack is the lowest
pack included in people’s comparisons with pack ,
so that r = 1, and is the prediction for the ob-
served price of pack i, i, based on the assumption that
profit is maximised, with the associated demand densities
as shown in Figure 1. Thus if the true demand densities
are as in Figure 1 and the figure for the variable cost per
pint is reflected accurately in the value, £0.2790, then the
model suggests that the vendor should chose pack prices,
,rup i, i = 2, 3 and 4, if he wishes to maximise his profit
when selling each of the higher packs.
:1ii
,rup i
pp
p
The match between the observed prices and those pre-
dicted by the RUP model is reason able, but there ap pears
to be an anomaly in the pricing of pack 2, where the pre-
dicted price is about £0.20 lower than that actually
achieved.
The anomalous price for pack 2 suggests that for many
people the 2-pint pack constitutes the entry-level pack.
This may reflect a natural break point in the customer
base, where purchasers of a 1 pint carton may constitute a
market with only weak links to the main market of those
buying larger cartons. This proposition may be tested by
rebasing the smallest pack considered by the prospective
purchaser of pack n, in the manner described in Section 2.
Setting the rebasing integer, r, as 2
r
, means that what
was originally pack 2 becomes the new pack 1. This re-
basing improves the price match for packs 3 and 4 (see
the last but one line of Table 1), and results in demand
density parameters of c = 0 and d = 1.66, see Figure 2.
A set of calculations were also made using 1v
c
£0.2790 per pint, as before, but this time using a Rec-
tangular demand density. The discrepancy on the price of
the 2-pint pack 2 is observed once again, but the results,
given in the last line of Table 1, are rough approximations
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
0123
MAP (£)
Probability densit
4
y
Pack 4: 6 pints
Pack 3: 4 pints
Figure 2. Tesco milk, August 2013, rebased c = 0, d = 1.66.
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692
to the quoted prices. Interestingly, the prices from this
version of the RUP model are close to the prices for
semi-skimmed milk in December 2009, discussed next.
5.2. Semi-Skimmed Milk, December 2009
Table 2 summarises the data, and compares the actual
prices with the optimal prices generated by the RUP
model when c = 3 and d = 280. Examining Figure 3, it
can be seen that the distribution is weighted towards the
higher end of each interval.
Table 2 shows that the match between prices for packs
of 4 pints or more is good, but once again there is an
anomaly with the price of pack 2, containing 2 pints. Re-
basing to make pack 2 the entry p ack produces th e resu lts
shown in the last line of Table 2. Th e prices of the 4-p int
and 6-pint packs are reproduced well once again, while,
by the nature of the procedure, the anomaly associated
with the 2-pint pack is eliminated. The values of c and d
that minimise the sum of the weighted squared errors,
, are and . Demand densi- ties
favouring high-end prices for pack s 3 and 4 (4 pints and 6
pints) are found once again, as shown in Figure 4.

2W5c450d
Table 2. Tesco semi-skimmed milk, December 2009.
Pack identifier, n cv1, £/pin t 1 2 3 4
Size, pints 1 2 4 6
Largeness, L 1 2 4 6
Price, £ 0.45 0.86 1.53 2.25
RUP Double
Power price (£)
c = 3, d = 280 0.2464 0.45 0.76 1.50 2.30
RUP Double
Power price (£)
(Rebased)
c = 5, d = 450
0.2464 - 0.86 1.50 2.28
0
1
2
3
4
5
6
7
8
9
00.511.522.53
MAP (£)
Probability densit
y
Pack 4: 6 pints
Pack 3: 4 pints
Pack 2: 2 pints
Figure 3. Tesco semi-skimmed milk, December 2009, c = 3, d
= 280.
0
1
2
3
4
5
6
7
01234
MAP (£)
Probability densit
y
Pack 4: 6 pints
Pack 3: 4 pints
Figure 4. Tesco semi-skimmed milk, December 2009, re-
based, c = 5, d = 450.
5.3. The Change in the Market for
Semi-Skimmed Milk between December
2009 and August 2013
Because Tesco prices semi-skimmed milk and whole
milk identically, and it has been assumed that the unit
variable cost is the same for the two grades of milk, the
price analysis for semi-skimmed milk is the same as for
whole milk in August 2013, as summarised by the results
in Table 1 and in Figures 1 and 2.
Comparing Figures 1 and 2 for August 2013 with the
corresponding figures for December 2009, namely Fig-
ures 3 and 4, it is clear that the demand density curves
have switched between these dates from a weighting to-
wards higher prices to a weighting in favour of lower
prices. This change in the characterisation of customer
sentiment is striking, but it is quite credible given the
continuing period of austerity and low growth in the UK
from 2009 to 2013, during which period real wages fell
for many peop le (8.5% between 2009 and 2012 [11]).
The effects of “austerity Britain” may also be detected
in the observed behaviou r of Tesco, which, while passing
on the 3.26 pence rise in the variable cost of a single pint
pack, absorbed half the increased cost reaching the
two-pint carton by constraining the rise in the price of
pack 2 to only 3 pence. Moreover, despite facing a rise in
variable costs of about 13 pence for its 4-pint pack 3,
Tesco actually reduced the price by 14 pence. Similarly,
an increase of 19 pence in the variable cost of the 6-pint
pack 4 was absorbed in full and the price was dropped 26
pence besides. Such moves would seem to reflect Tesco
observing a significant softening in the market, fully con-
sistent with the change in the shape of the demand densi-
ties as illustrated by Figures 1-4.
6. Using the RUP Model to Explain the Price
of Eggs in UK Supermarkets
Data were taken from the My Supermarket website in
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December 2009 [7] and in August 2013 [8] for “value”
eggs at Tesco, barn and free-range eggs at Sainsbury’s
and organic free range eggs at Waitrose.
Estimates of the variable costs per dozen eggs were
made from the average price per dozen paid to egg pro-
ducers, as provided by DEFRA [12] on a quarterly basis.
Data are supplied for eggs categorized as intensive, barn,
free range and organic, with an overall average also given.
The data were incomplete for barn and organic eggs from
the first quarter of 2012 onwards, and so extrapolations
were made using the price of free range eggs as a guide:
free range eggs were intermediate in price between barn
eggs and organic eggs for the years for which data were
essentially complete, from 2007 to 2011 inclusive. In
addition, data for the 3rd quarter of 2013 were not avail-
able at the time of the calculations, and so 2nd quarter
data were used instead.
It is important to make clear that the benefits of bulk
sales are not linked to any production or distribution
economies of scale (or scope). Indeed, we consider the
vendor to be a retailer who is faced with something close
to a constant marginal cost of the product (and thus also a
constant per-unit variable cost and a constant average
variable cost). The retailer is not greatly affected by any
possible economies or diseconomies in production costs
as he can gain access to supplies from many different
producers each of whom is operating close to his opti-
mum scale but all of whom can supply the product at the
competitive (or contracted) wholesale price. The retailer
will thus increase profit by increasing sales whenever he
can do so at a price that is above his marginal costs.
The variable costs associated with egg packaging were
judged to be less than those associated with milk process-
sors, so that the additional variable costs were repre-
sented simply by adding 25% to the price paid to the
producer, roughly half the mark-up on milk. The esti-
mated variable costs per half dozen for the various egg
types are shown in Table 3.
Table 3. Estimated variable cost per half dozen eggs (all
prices in £).
Date Intensive Barn Free RangeOrganic
Paid to
producer per
dozen 0.5630.74 0.901 1.373
December
2009 Estimated
variable cost per
½ dozen 0.35190.4625 0.563 0.858
Paid to producer
per dozen 0.7540.904 1.055 1.737
August
2013 Estimated
variable
cost per
½ dozen
0.47130.5652 0.6594 1.086
6.1. Tesco Value Mixed Eggs
The Double Power demand density matches exactly the
observed price for pack 2 (15 eggs) of Tesco’s Value
Mixed Eggs in December 2009 given in Tabl e 4 when c
= 0 and d = 7.8. See Figure 5. However, the Double
Power demand density is unable to match the observed
price for pack 2 in August 2013. It gets closest when c =
0 and d = 0.01, see Figure 6, when the profit-maximizing
price for pack 2 is £1.48 rather than £1.35. This may be a
result of the inexact nature of the data. It is necessary to
reduce the variable cost per half dozen given in Table 3
by about 7 pence to £0.4019 to enable the model to re-
produce the observed price of £1.35 for pack 2 with c = 0
and d = 0.01.
The general trend of market tightening observed in the
milk market would seem to be mirrored in the case of
these commodity eggs.
Comparing Figures 5 and 6, it is clear that people in
the target market are taking a much less relaxed view of
price, with significant clustering at the lower end of the
price range.
Table 4. “Value” eggs at Tesco and “Basics” eggs at Sains-
bury (December 2009 and August 2013).
Supermarket Tesco Sainsbury
Product name Tesco Value
Mixed Eggs Sainsbury’s Basics
Barn Eggs
Pack identifier, n1 2 1 2
Number in pack6 15 6 18
Largeness, L 1 2.5 1 3
Price, £,
Dec. 2009 0.91 1.50 0.91 1.85
Price, £,
Aug. 2013 0.87 1.35 1.00 2.10
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
00.511.522.53
MAP
Pro bability dens ity
Figure 5. Tesco value mixed eggs, December 2009, c = 0, d =
7.8.
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0
5
10
15
20
25
00.511.522.53
MAP
Probability density
Figure 6. Tesco value mixed eggs, August 2013, c = 0, d =
0.01.
6.2. Sainsbury Basics Barn Eggs
The Double Power demand density matches exactly the
observed prices given in Table 4 for Sainsbury’s Basics
Barn Eggs, both in December 2009 when c = 0 and d =
1.49 and in August 2013 when c = 0 and d = 0.01. See
Figures 7 and 8. It is clear from comparing these figures
that the market has tightened for Sainsbury’s Basics eggs
in the same way as for Tesco’s Value eggs, again with a
preponderance of people limiting their MAP to a low
level.
A further interpretation of the degree of market sof-
tening may be found by using the demand density char-
acteristic of December 2009 (c = 0 and d = 1.49) to pre-
dict the price of pack 2 of Sainsbury’s Basics Barn Eggs
in August 2013. Given the pack 1 price of £1.00, the pre-
dicted price of pack 2 is £2.14. Thus this manifestation of
the softening of the market has cost Sainsbury 4p in
profit on its 18-egg pack of Basics Barn Eggs.
6.3. Sainsbury’s Woodland Free Ran g e Large
Eggs
These eggs constitute Sainsbury’s top of the range offer-
ing. The Double Power demand density matches the ob-
served prices given in Table 5 for Sainsbury’s Large
Woodland Free Range Eggs in December 2009 when c =
34.6 and d = 100. Meanwhile, the observed prices listed
in Table 6 for Sainsbury’s Woodland Free Range Large
Eggs (there seems to have been a minor rewording of the
name in the years between 2009 and 2013) in August
2013 are matched when c = 6 and d = 65. See Figures 9
and 10.
Demand density remained biased towards the upper
end of the price interval in both December 2009 and Au-
gust 2013. However there appears some degree of market
softening, with a greater proportion of the target market
having a MAP in the lower range of the interval more
recently. It would appear that the potential purchasers of
Sainsbury’s Woodland Free Range Large Eggs were
highly price-insensitive in December 2009 but have be-
come less so after the years of “austerity” following 2009
(by mid 2013, UK GDP was still down by 3.3% on what it
had been 5 years earlier). Even in 2013 , however, customers
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 0.5 1 1.5 2 2.5 3
MAP
Probability density
Figure 7. Sainsbury’s basics barn eggs, December 2009, c =
0, d = 1.49.
0
2
4
6
8
10
12
14
16
00.511.522.53
MAP
Probability den s ity
Figure 8. Sainsbury’s basics barn eggs, August 2013, c = 0, d
= 0.01.
Table 5. Top of the price-range eggs: Sainsbury and Wait-
rose, December 2009.
Supermarket Sainsbury Waitrose
Product name Sainsbury’s Large
Woodland Free
Range Eggs
Waitrose Organic Large
Free Range Columbian
Blacktail Hen Eggs
Pack identifier, n1 2 1 2
Number in pack6 12 6 12
Largeness, L 1 2 1 2
Price, £ 1.58 2.98 2.28 4.30
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Table 6. Top of the price-range eggs: Sainsbury and Wait-
rose, August 2013.
Supermarket Sainsbury Waitrose
Product name Sainsbury’s
Woodland Free
Range Large Eggs
Duchy Originals from
Waitrose: Organic
West Country Large
Free Range Eggs
Pack identifier, n 1 2 1 2
Number in pack 6 12 6 12
Largeness, L 1 2 1 2
Price, £ 1.70 2.90 2.36 4.70
0
2
4
6
8
10
12
14
0123
MAP
Probability densit
y
Figure 9. Sainsbury’s large woodland free range eggs, De-
cember 2009, c = 34.6, d = 100.
0
0.5
1
1.5
2
2.5
3
3.5
0123
MAP
Probability densit
Figure 10. Sainsbury’s woodland free range large eggs, Au-
gust 2013, c = 6, d = 65.
for these eggs are tending to see the packs before them
not so much as bundles of commodities (when it would
be difficult to raise the price for a dozen much above the
price of half a dozen as explained in [1]) but rather as
containing valuable, differentiated items to be valued
closer to their maximum worth, the highest MAP:
2max 201
2ppp
. The more evocative branding,
“Woodland”, as opposed to “Basics”, has, no dou bt, been
chosen to help in this regard.
The achieved price for pack 2 in December 2009 was
2£2.98p
, within 6% of the highest MAP possible,
namely 20£3.16p
. However, while 21
in Au-
gust 2013, at 2
pp
£2p.70
, the achieved price was more
than 20% off the highest MAP, 20 , indicating a
softening even at the top end of Sainsbury’s egg market.
£3.40p
6.4. Waitrose Organic, Free Range, La rge Eggs
Waitrose’s highest priced eggs in December 2009 were
“Waitrose Organic Large Free Range Columbian Black-
tail Hen Eggs”, but by August 2013 their position had
been taken by “Duchy Originals from Waitrose Organic
West Country Large Free Range Eggs”. The Duchy
Originals company, named after the Duchy of Cornwall
estates held by the Prince of Wales, was set up by the
Prince in 1990 as a supplier of organic foo d. However, 20
years into its development, the company reached an
agreement with Waitrose whereby the latter would invest
and pay a royalty to Duchy, set initially at £1 million. In
return, Waitrose won the exclusive right to sell and dis-
tribute the products, which from August 2010 would be
rebranded “Duchy Originals from Waitrose”.
The Double Power demand density matches the ob-
served prices given in Table 5 for Waitrose Organic
Large Free Range Columbian Blacktail Hen Eggs in De-
cember 2009 when c = 34.2 and d = 100. These parame-
ters are almost exactly the same as those that generated a
match with the prices of Sainsbury’s Large Woodland
Free Range Eggs in December 2009. The distribution is
heavily weighted towards the upper end of the price in-
terval, as shown in Figure 11.
Interestingly, the observed prices listed in Table 6 for
Duchy Originals from Waitrose Organic West Country
Large Free Range Eggs in August 2013 required the de-
mand density to be almost a spike at the very top of the
price range, produced when c = 810 and d = 820. See
Figure 12.
This hardening of the market for Waitrose’s most ex-
pensive eggs illustrates a divergence of behaviour from
Sainsbury’s top of the range eggs. While the achieved
price for Waitrose’s pack 2 in December 2009 was
2£4.30p
, close to 20 £4.56p
, the achieved price,
2£4.70p
, for a dozen eggs in August 2013 was hardly
different from the highest possible MAP, 20 £4.72p
.
Waitrose may be benefitting here not only from the pos-
sible greater resilience of its customer base in the face of
economic austerity but also from clever marketing in
allying its own brand with Duchy and its royal links.
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0
1
2
3
4
5
6
7
8
9
10
012345
MAP
Probability density
Figure 11. Waitrose organic large free range Columbian
Blacktail hen eggs, December 2009, c = 34.2, d = 100.
0
5
10
15
20
25
30
35
40
012345
MAP
Pro bability density
Figure 12. Duchy originals from Waitrose organic west
country large free range eggs, August 2013, c = 810, d =
820.
7. Using the RUP Model to Examine the
Price of USB Memory Sticks Offered on
the Internet
USB memory sticks are the most convenient way of
storing large amounts of computer data for exchange be-
tween PCs and laptop computers, for example. Their ca-
pacity has grown enormously over recent years. The en-
try-level capacity, tens of Megabytes in the mid 2000s,
had reached 1 gigabyte (Gb) of memory in December
2009, a size that was already on the point of being su-
perseded by the 2 Gb memory stick, with the top of the
easily available commercial range being 16 Gb. By Au-
gust 2013, the entry-level memory stick was 4 Gb, a size
about to be replaced by 8 Gb, while the top of the easily
available commercial range had reached 128 Gb.
There is limited scope for product differentiation in the
field of USB memory sticks since small size is essential
for the device and the need for functionality makes it
difficult to customise to any great extent, although at-
tempts are now being made by offering the same capacity
stick in different colours. Competition is fierce, with
many manufacturers competing, and a strong need
amongst all manufacturers to keep up with the technol-
ogy and increase the size of the largest available storage
capacity. Industry practice is for pack size to increase by
a factor of 2 at each step.
Prices were taken from Amazon’s UK web site in De-
cember 2009 [13] and August 2013 [14], with less ex ten-
sive data obtained from the same website in August 2010.
7.1. December 2009
Table 7 shows the prices for the Integral USB memory
sticks of capacity: 1, 2, 4, 8 and 16 Gb. Given the ab-
sence of information on the unit variable cost, it was de-
cided to specify the shape of the demand density curve
and then vary the variable cost of pack r so as to mini-
mise the sum of the weighted errors, , with the
rebasing integer, r, set to unity in the first instance. Set-
ting c = 0 and d = 2 produces a distribution weighted
moderately towards the lower end of the price interval,
but with a significant fraction of the target population
prepared to pay higher prices. These parameters were
chosen to bring the shape of curve (Figure 13) roughly
into line with the curves found to give good matches to
the commodity egg prices at the same date (see Figures 5
and 7).

Wr
It was not found possible to reproduce the prices of
packs 2, 3 and 4 satisfactorily using a single RUP model.
Instead three different versions were required to generate
prices for pack 2, packs 3 and 4 and packs 4 and 5. This
suggests a segmented market, with purchasers interested
in buying pack 4 (8 Gb) having no interest in pack 1 (1
Gb), and purchasers interested in pack 5 (16 Gb) disre-
garding the existence of packs 1 and 2 (2 Gb).
The reduction in the quoted price for a 2 Gb below that
of a 1 Gb memory stick reveals an economic anomaly
that the RUP model is unable to reproduce. In its closest
Table 7. USB memory sticks of the integral brand offered
for sale on Amazon.co.uk, December 2009.
Size (Gb) cv1, £1 2 4 8 16
Pack
identifier, n 1 2 3 4 5
Largeness, L 1 2 4 8 16
Price, £ 6.956.44 7.88 12.7316.95
<1.176.956.96 - - -
0.81- 6.44 7.00 13.54-
RUP
Double
Power
price, £,
c = 0, d = 20.71- - 7.88 9.5 18.66
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0
0.05
0.1
0.15
0.2
0.25
0481216
MAP, £
Probability density
Figure 13. USB sticks demand density for pack 2: 2 Gb,
December 2009, c = 0, d = 2.
approach, the price of pack 2 is only marginally greater
than that of pack 1, an outcome that will occur when 1v
takes any value less than or equal to £1.17 per Gb. The
model prices and values for are shown in Table 7.
c
1v
The three versions of the RUP model are in agreement
in predicting a low variable cost per gigabyte of memory.
Although uncertainty over the shape of the demand den-
sity curves rules out a confident prediction, the results of
this modelling exercise suggest that the variable cost in
2009 might have been around £0.75 per gigabyte.
c
7.2. August 2013
Table 8 shows the prices for the Integral USB memory
sticks of capacity: 4, 8, 16, 32, 64 and 128 Gb. Tables 7
and 8 show striking ly similar price structures, except th at
the capacity of each of the memory sticks has increased
by a factor of 4 by August 2013.
As with Section 7.1, the procedure for modelling was
to adjust the unit variable cost to find the best match to
the data, while keeping the parameters defining the de-
mand densities the same as their December 2009 values,
namely c = 0 and d = 2. Figure 14 shows the demand
densities for packs 3 to 6.
Two versions of the RUP model were required, one to
generate the price for pack 2, and the other to generate
the prices successively of packs 3, 4, 5 and 6. The
model-generated prices and associated values for are
included in Table 8. Once again the unit variable cost
was low, with the best matches to the data occurring
when 1 per 4 Gb, that is to say £0.31 per Gb.
This would suggest that the variable cost per Gb had
dropped by a bout 6 0% o ver the 4 year perio d.
1v
c
£1.25
v
c
7.3. The Evolution of the Price Structure of USB
Sticks
It is pointed out in [1] that the consumer has a natural
Table 8. USB memory sticks of the DataTraveler brand
offered for sale on Amazon.co.uk, August 2013.
Size (Gb) cv1, £ 4 8 16 32 64 128
Pack
identifier, n 1 2 3 4 5 6
Largeness, L 1 2 4 8 16 32
Price, £ 5.796.03 8.06 14.40 27.0160.62
1.215.796.03 - - - -
RUP Double
Power price, £,
c = 0, d = 21.28- 6.03 7.72 15.24 30.4857.78
0
0.05
0.1
0.15
0.2
0.25
0.3
0 102030405060708090100
MAP, £
Probability density
Pack 3: 16 Gb
Pack 4: 32 Gb
Pack 5: 64 Gb
Pack 6: 128 Gb
Figure 14. USB sticks demand densities for packs 3 to 6,
August 2013, c = 0, d = 2.
tendency to value pack 2 of a commodity the same as
pack 1 whenever pack 2 contains double the quantity held
in pack 1. A similar process will be in play when pack 3
is twice the size of pack 2. On this basis one would ex-
pect the prices of packs 1, 2 and 3 to be very similar. And,
indeed, it is clear that this is the case in both December
2009 and August 2013.
The vendor may dispute and resist this valuation
through product differentiation and branding, as demon-
strated by Sainsbury with its “Sainsbury’s Woodland
Free Range Large Eggs”. The same process has been
used even more successfully by Waitrose with its “Duchy
Originals from Waitrose Organic West Country Large
Free Range Eggs”, a product description that combines
product differentiation with complexity, two features
identified at the end of Section 3 of [1] as causing the
consumer to value the good as other than a commodity.
The main route open to the vendor of USB memory
sticks is to differentiate his product through novelty, as
manifested by a capacity that will be judged unusually
high by those in his customer base. This will allow the
memory sticks with higher capacity to command higher
prices on a temporary basis. But as the capacity of the
memory stick becomes less unusual, as the novelty and
differentiation wear off, so the price of the stick will fall
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ever closer to the price of the memory stick below it,
which will, in turn, be declining towards the price of the
next lowest memory stick, and so on. There will be, as a
result, a decline towards the price of the lowest capacity
stick. The sales of the stick with the lowest capacity will
dry up at the point when the prices of the two lowest
sticks are equal, and the vendor will drop it from his
catalogue.
Thus the 1 Gb memory stick ceased to be offered for
sale on Amazon shortly after December 2009, leaving the
2 Gb memory stick as the entry level pack, priced at
£6.44, no higher than the 1 Gb pack it replaced. Less than
a year later, in August 2010, the Kingston Datatraveler
101 4 Gb USB 2.0 Flash Drive was being offered on
Amazon at £6.19, so that the days of the 2 Gb memory
stick were clearly numbered. The 4 Gb memory stick,
priced at £5.79, is the entry level pack in August 2013,
but it is clearly about to be supplanted by a 8 Gb stick,
priced at £6.03, almost as low. Clearly, the 16 Gb mem-
ory stick is set to become the entry-level pack in the near
future, and the 32 Gb memory stick a little later. It is the
RUP mechanism that lies behind the similarity of the
pack-price structures revealed by Tab l es 7 and 8.
It is thus clear that the RUP model has been able to ex-
plain not only the current pricing structure of the market
in USB memory sticks but also how it has evolved and is
likely to evolve over time.
8. Discussion
The figures for milk and egg prices have built on the
available farm gate and egg producer prices that were
used to estimate per-unit variable costs, 1v. Neverthe-
less it is clear that the resulting figures are only approxi-
mations. These per-unit variable costs feed through to the
demand densities derived to match the observed prices,
assumed optimal for the vendor. Thus the resulting de-
mand densities will be approximate also.
c
That said, the per-unit variable costs for milk are ex-
pected to be reasonably close to the true values, and,
subject to a greater tolerance, the same may be said for
the variable costs of eggs. Moreover, it is very helpful
that the demand distributions are bounded by the re-
quirement that the area under the curve must be unity, so
that, in this case, , where

max
1d
n
n
p
up huu
1
n
hp is
the demand density for MAP for pack n. This inherent
property allows the versatile Double Power density to
provide a good coverage of plausible demand scenarios,
and one of its manifestations can be expected to provide a
reasonable approximation to the true demand density.
Finding the appropriate realisation (setting the c and d
parameters) becomes theoretically possible when the
variable cost, 1v, is available, and this is what has been
done for milk and egg prices. The ou tputs of the analysis
are then the demand density curves, as shown in Figures
1-12. Even with avowedly approximate data, these de-
mand densities provide not only a reasonable explana-
tion for the observed prices but also, via their changes
over time, a credible interpretation of consumers’ reac-
tions to changed economic circumstances. Amongst other
findings, the curves point to the advantages to th e vendor
of product differentiation.
c
Less information was available on USB memory sticks,
and it was necessary to assume a plausible demand den-
sity, based on those found for Tesco’s and Sainsbury’s
commodity eggs in December 2009, and back-calculate
the corresponding variable cost per Gb. While no quanti-
tative claim on the accuracy of the figures can be made,
the deduction that the calculated cost per Gb in Decem-
ber 2009, already low, falls to an even lower figure in
August 2013 seems intuitively appealing.
Finkelstein has pointed out that models may have a va-
riety of uses, from descriptive through explanatory to
predictive [15]. It has been demonstrated that the RUP
model can have useful explanatory power even when
available data are limited.
Full predictive power for the RUP model requires an
accurate knowledge of 1) the price of pack r, the effec-
tive entry-level pack, 2) the per-unit variable cost, 3) the
size of the pack in question and 4) the form of the de-
mand density. The vendor should have a good grasp of
the first three items, even if he may not know the fourth.
Given this admittedly imperfect knowledge, the vendor
may still use the Uniform or Rectangular demand density
to make an initial estimate of his profit-maximising
prices. This is because the rectangular demand density
depends ultimately only on items 1), 2) and 3) and may
be applied successively to build up the prices of packs
1,2, ,rr n
.
In using the Uniform or Rectangular demand density,
the vendor will be employing the assumption that the
market is neutral, neither soft nor hard. The procedure
has been shown to produce starting prices that are close
enough to the optimal prices for them to be used by the
retailer as the basis for market testing and hence optimi-
sation.
9. Conclusions
The theory of Relative Utility Pricing (RUP) has been
developed to understand the pricing of packs of different
sizes in supermarkets and on the internet. It has been
shown that the observed price for a pack can be ex-
plained in terms of its size relative to the smallest pack
considered for purchase by the customer (his baseline
pack), the price and per-unit variable cost associated with
the baseline pack and the probability density for maxi-
mum acceptable price – the demand density. Given this
full set of data, the price emerges as the outpu t of a profit
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maximising calculation.
If knowledge of the demand density is poor or non-
existent, it is still possible for a vendor with a good
knowledge of his unit variable cost to calculate an ap-
proximation to the profit-maximising price by using a
Uniform or Rectangular demand density to represent
customer demand.
The RUP model has been successful in generating
prices that provide an approximate match to those ob-
served for supermarket milk and eggs by means of ad-
justing the demand density. The resulting demand densi-
ties for milk and value eggs reveal a softening of the
market for farm retail commodities between December
2009 and August 2013 , which is fully consistent with the
long period of low growth and falling real wages experi-
enced by the UK economy.
The RUP model has been applied to the silicon chip
sector to explain the current prices of USB memory sticks,
how those prices have evolved and how they are likely
evolve over time. It has been shown that the silicon chip
industry’s established practice of introducing new memo-
ries with twice the capacity has had the beneficial
side-effect for the consumer that the price of the new
product that is twice as good as the old will settle down at
the old price. The mechanism will have pressured manu-
facturers to create higher capacity products due to the
previous generation’s prices quickly reaching com-
modities’ rates and thus returning low profits. Hence this
mechanism, given an economic explanation for the first
time, will have contributed to the exceptionally high rate
of technological progress in the memory industry.
Even though the data on cost and market structure are
incomplete, the RUP model has brought an understand-
ing of the key characteristics of real markets for different
packs of the same good, whether that good is a farm
product sold in a supermarket or a silicon chip offered on
the internet. The sizing and pricing of packs of the same
good have been given an economic explanation, irrespec-
tive of the good being sold. Thus the paper’s results
should be of interest to vendors, consumers and regula-
tors.
10. Acknowledgements
The authors would like to acknowledge numerous fruitful
discussions during the preparation of the paper with Mr.
Roger Jones (Hon. Research Fellow, City University
London) and with Mr. Edward Ross and Dr. Ian Wad-
dington, of Ross Technologies Ltd.
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