When Do Price Thresholds Matter in Retail Categories?

Marketing Science, Vol. 26, No. 1, pp. 83-100, January-February 2007

18 Pages Posted: 9 Mar 2004 Last revised: 23 May 2008

See all articles by Koen H. Pauwels

Koen H. Pauwels

Ozyegin University

Shuba Srinivasan

Boston University - Questrom School of Business

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics

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 benchmarkprices, 16% reflect competitive benchmarkprices, 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.

Keywords: kinked demand curve, smooth-transition regression models, time-series analysis, asymmetric price

JEL Classification: M, M31, C44

Suggested Citation

Pauwels, Koen H. and Srinivasan, Shuba and Franses, Philip Hans, When Do Price Thresholds Matter in Retail Categories?. Available at SSRN: https://ssrn.com/abstract=496703

Koen H. Pauwels

Ozyegin University ( email )

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

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

Shuba Srinivasan

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

Philip Hans Franses (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1278 (Phone)
+31 10 408 9162 (Fax)

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