Demand-Based Pricing Versus Past-Price Dependence: A Cost-Benefit Analysis

Journal of Marketing, Vol. 72, pp. 15-27, March 2008

14 Pages Posted: 25 May 2008

Abstract

The authors develop a conceptual framework of the factors that motivate a retailer's decision to rely on demand conditions and past prices in setting current and future prices. Specifically, they examine the circumstances under which retailers choose demand-based pricing versus past-price dependence for different brands and categories. Given scarce resources and costs of price adjustments, demand-based pricing is more likely when the customerdriven and firm-driven costs of adjusting pricing patterns are low or when the benefits of such adjustments are high. First, the customer-driven benefits of demand-based pricing are expected to be greater in categories with higher penetration and for brands with higher market share and higher demand sensitivity to price. Second, the firm-driven benefits are greater for categories with higher private-label share. Finally, the customer-driven costs are greater for expensive categories, whereas the firm-driven costs are greater for categories with many stockkeeping units. The empirical findings support the conceptual framework, implying that customer-driven and firm-driven benefits are the main stimulants in the retailer's choice of demand-based pricing. In contrast, customer-driven and firm-driven costs significantly hinder retailer implementation of demand-based pricing. These insights enable retailers to identify problem areas and opportunities to improve the allocation of scarce pricing resources. The results also contribute to the ongoing debate in economics and marketing on the rationality of observed past-price dependence. Whereas previous research points to the negative impact on gross margins of this practice, the authors find that retailers weigh the costs and benefits of demand-based pricing rather than adhere to past-pricing patterns.

Keywords: demand-based pricing, past-price dependence, retail-price drivers, time-series models

Suggested Citation

Srinivasan, Shuba and Pauwels, Koen H. and Nijs, Vincent R., Demand-Based Pricing Versus Past-Price Dependence: A Cost-Benefit Analysis. Available at SSRN: https://ssrn.com/abstract=1136351

Shuba Srinivasan (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
6173535978 (Phone)
6173534098 (Fax)

HOME PAGE: http://smgnet.bu.edu/mgmt_new/profiles/SrinivasanShuba.html

Koen H. Pauwels

Ozyegin University ( email )

Kusbakisi Cd. No: 2
Altunizade, Uskudar
Istanbul, 34662
Turkey

HOME PAGE: http://www.marketdashboards.com

Vincent R. Nijs

Northwestern University - Department of Marketing ( email )

Kellogg School of Management
2001 Sheridan Rd.
Evanston, IL 60208
United States

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