The dynamics of price elasticity of demand in the presence of reference price effects |
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Authors: | Gadi Fibich Arieh Gavious Oded Lowengart |
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Institution: | (1) Tel Aviv University, Tel Aviv, Isarel;(2) Ben Gurion University, Israel |
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Abstract: | The authors derive an expression for the price elasticity of demand in the presence of reference price effects that includes
a component resulting from the presence of gains and losses in consumer evaluations. The effect of reference price is most
noticeable immediately after a price change, before consumers have had time to adjust their reference price. As a result,
immediate-term price elasticity is higher than long-term elasticity, which describes the response of demand long after a price
change, when reference price effects are negligible. Furthermore, because of the differential effect of gains and losses,
immediate-term price elasticity for price increases and price decreases is not equal. The authors provide a quantitative definition
for the terms immediate term and long term, using the average interpurchase time and the discrete “memory” parameter. Practical
consequences of the distinction between immediate- and long-term elasticities for the estimation and use of elasticity values
are discussed.
Gadi Fibich (fibich@math.tau.ac.il) is an associate professor in the Department of Applied Mathematics at Tel Aviv University. This research
grew out of his interest in applications of mathematical modeling to economics and management science. He is currently working
on auction theory.
Arieh Gavious (ariehg@bgumail.bgu.ac.il) is a senior lecturer in the Department of Industrial Engineering at Ben Gurion University, Israel.
His interest is in application of game theory to economics and management science problems. His current interest is in auction
theory.
Oded Lowengart (odedl@bgumail.bgu.ac.il) is a senior lecturer in the Department of Business Administration at Ben Gurion University, Israel.
His research interests are in the areas of modeling pricing effects on consumer behavior at both aggregate and disaggregate
levels, product positioning, and market share forecasting and diagnostics. |
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Keywords: | Reference price price elasticity immediate term promotional elasticity |
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