When Do Price Thresholds Matter in Retail Categories?

  • Authors:

  • Koen Pauwels;Shuba Srinivasan;Philip Hans Franses

  • Affiliations:

  • Tuck School of Business, Dartmouth College, 100 Tuck Drive, Hanover, New Hampshire 03755;The A. Gary Anderson School of Management, University of California, Riverside, California 92521;Econometric Institute and Department of Business Economics, H11-34, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands

  • Venue:
  • Marketing Science
  • Year:
  • 2007

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Abstract

Marketing literature has long recognized that brand price elasticity need not be monotonic and symmetric, but has yet to provide generalizable market-level insights on threshold-based price elasticity, asymmetric thresholds, and the sign and magnitude of elasticity transitions. This paper introduces smooth transition regression models to study threshold-based price elasticity of the top 4 brands across 20 fast-moving consumer good categories. Threshold-based price elasticity is found for 76% of all brands: 29% reflect historical benchmark prices, 16% reflect competitive benchmark prices, and 31% reflect both types of benchmarks. The authors demonstrate asymmetry for gains versus losses on three levels: the threshold size and the sign and the magnitude of the elasticity difference. Interestingly, they observe latitude of acceptance for gains compared to the historical benchmark, but saturation effects in most other cases. Moreover, category characteristics influence the extent and the nature of threshold-based price elasticity, while individual brand characteristics impact the size of the price thresholds. From a managerial perspective, the paper illustrates the sales, revenue, and margin implications for price changes typically observed in consumer markets.