Working Paper: CEPR ID: DP16949
Authors: Roman Inderst; Obradovits Martin
Abstract: Especially in markets with frequent price promotions, where consumers constantly have to form preferences over changing offers, product choice may depend on a relative assessment of prices and qualities. We show how such “relative thinking” profoundly influences firms’ pricing and product-positioning strategies, compared to a benchmark with standard preferences. When competition is sufficiently intense, firms want to differentiate in the quality space, and they may find it advantageous to occupy the lower end of the quality spectrum. Such a strategy pays off particularly for firms with a small base of loyal customers, which then compete more aggressively for shoppers.
Keywords: relative thinking; product positioning; vertical differentiation; promotions; sales; price competition
JEL Codes: D11; D22; L11; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Relative thinking (Y80) | firms' pricing strategies (L11) |
| Firms with fewer loyal customers (D26) | lower-quality product strategies (L15) |
| Intensity of competition (L13) | (Relative thinking -> product positioning) (D46) |
| Relative thinking (Y80) | consumers assess product choices (D12) |
| Intensity of competition (L13) | (Relative thinking influences firm strategies) (L22) |