Micro-Responses to Shocks: Pricing, Promotion, and Entry

33 Pages Posted: 29 Oct 2018 Last revised: 26 Nov 2018

See all articles by Alexis Antoniades

Alexis Antoniades

Georgetown University School of Foreign Service in Qatar

Sofronis Clerides

University of Cyprus - Department of Economics; Centre for Economic Policy Research (CEPR); University of Bologna - Rimini Center for Economic Analysis (RCEA)

Date Written: October 2018

Abstract

We study the response of markets to a firm-specific shock in a natural experiment setting. In 2006, a boycott of Danish products in several Arab countries was devastating for Danish cheese firms. In Saudi Arabia their market share collapsed from 16.5% in January to less than 1% in March and never fully recovered: it was 6.3% in 2009. By analyzing micro-level (scanner) price and expenditure data we find that (i) Danish firms lowered prices but kept the product mix the same; (ii) non-Danish firms kept prices constant but changed their product mix by introducing new products and new product bundles; and (iii) non-Danish firms chose to introduce products that were identical to the Danish in order to compete head-to-head. The finding that Danish firms adjusted to the negative demand shock through the intensive margin and non-Danish to the positive through the extensive is hard to reconcile with existing pricing theories or theories on multi-product firms. We offer two potential explanations that can help reconcile our findings with existing models.

Keywords: boycotts, demand shock, multi-product firms, Saudi Arabia

JEL Classification: L10

Suggested Citation

Antoniades, Alexis and Clerides, Sofronis, Micro-Responses to Shocks: Pricing, Promotion, and Entry (October 2018). CEPR Discussion Paper No. DP13281. Available at SSRN: https://ssrn.com/abstract=3274624

Alexis Antoniades (Contact Author)

Georgetown University School of Foreign Service in Qatar ( email )

Education City
Al Huqoul St
Doha
Qatar

Sofronis Clerides

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus
+35 7 2289 2450 (Phone)
+35 7 2289 2432 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

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