The impact of advertising on consumer price sensitivity in experience goods markets

In this paper we use Nielsen scanner panel data on four categories of consumer goods to examine how TV advertising and other marketing activities affect the demand curve facing a brand. Advertising can affect consumer demand in many different ways. Becker and Murphy (Quarterly Journal of Economics 108:941–964, 1993) have argued that the “presumptive case” should be that advertising works by raising marginal consumers’ willingness to pay for a brand. This has the effect of flattening the demand curve, thus increasing the equilibrium price elasticity of demand and the lowering the equilibrium price. Thus, “advertising is profitable not because it lowers the elasticity of demand for the advertised good, but because it raises the level of demand.” Our empirical results support this conjecture on how advertising shifts the demand curve for 17 of the 18 brands we examine. There have been many prior studies of how advertising affects two equilibrium quantities: the price elasticity of demand and/or the price level. Our work is differentiated from previous work primarily by our focus on how advertising shifts demand curves as a whole. As Becker and Murphy pointed out, a focus on equilibrium prices or elasticities alone can be quite misleading. Indeed, in many instances, the observation that advertising causes prices to fall and/or demand elasticities to increase, has misled authors into concluding that consumer “price sensitivity” must have increased, meaning the number of consumers’ willing to pay any particular price for a brand was reduced—perhaps because advertising makes consumers more aware of substitutes. But, in fact, a decrease in the equilibrium price is perfectly consistent with a scenario where advertising actually raises each individual consumer’s willingness to pay for a brand. Thus, we argue that to understand how advertising affects consumer price sensitivity one needs to estimate how it shifts the whole distribution of willingness to pay in the population. This means estimating how it shifts the shape of the demand curve as a whole, which in turn means estimating a complete demand system for all brands in a category—as we do here. We estimate demand systems for toothpaste, toothbrushes, detergent and ketchup. Across these categories, we find one important exception to conjecture that advertising should primarily increase the willingness to pay of marginal consumers. The exception is the case of Heinz ketchup. Heinz advertising has a greater positive effect on the WTP of infra-marginal consumers. This is not surprising, because Heinz advertising focuses on differentiating the brand on the “thickness” dimension. This is a horizontal dimension that may be highly valued by some consumers and not others. The consumers who most value this dimension have the highest WTP for Heinz, and, by focusing on this dimension; Heinz advertising raises the WTP of these infra-marginal consumers further. In such a case, advertising is profitable because it reduces the market share loss that the brand would suffer from any given price increase. In contrast, in the other categories we examine, advertising tends to focus more on vertical attributes.

An Investigation of Consumer Brand Choice Behavior Across Different Retail Formats

There has been a blurring with respect to the retail formats because of competition and proliferation of different types of formats. In this research, we use a unique scanner panel dataset to investigate how brand choice behavior varies for the same consumer shopping for the same brand across different retail formats. We develop hypotheses pertaining to promotion sensitivity, price sensitivity, package size preference, and effects of demographic and shopping variables on consumer brand choice behavior and test them using a multi-format probit choice model that allows for the estimation of the cross-format differences with respect to the above. We find that consumers exhibit different promotion and price sensitivities in brand choice behavior between the mass merchandise format and supermarkets. Discussions and insights are provided.     

Retail channel price discrimination

This paper examines price differentials of identical items across retail channels. Many consumer packaged goods are sold through both grocery and drug stores. Liquor is unique in that in much of the country there is a third retail channel of distribution, liquor stores. If consumers in each retail channel differ in their willingness to pay for certain items, then sellers can exploit those differences and charge different prices for the same items in each channel. We examine a unique data set of pooled cross sectional retail scanner data on wine to test whether sellers use retail channel to identify heterogeneous consumer market segments and engage in price discrimination. We begin by presenting a model of price discrimination by retail channel along with behavioural assumptions regarding shoppers in each channel. Next we examine sales by retail channel and find persistent price differentials for the same item across retail channel after controlling for sample selection bias and seasonality. Lastly, we estimate the price elasticity of demand correcting for endogeneity and find differences across channel consistent with the price differentials. The extent of price differential, however, differs significantly with respect to price point.     

Customer choices of manufacturer versus retailer brands in alternative price and usage contexts

This article offers a context-dependent theory of how price changes influence consumer purchase choice for fast moving consumer goods (FMCGs) for manufacturer (large household share) and retailer (small household share) brands. The theory proposes that the influence of price on demand is systematically very sensitive to context effects; more specifically, the theory includes the hypothesis that elasticity is much greater when the price change results in the manufacturer and retailer brands having the same price compared to when the price change keeps the manufacturer brand price above the retailer brand price. The implicit and/or explicit association with higher quality with the manufacturer versus retailer brand may be the main reason for buying the higher priced manufacturer brand. Decreasing the price of the manufacturer brand to equal the retailer brand's price takes away the primary reason for buying the retailer brand (i.e., saving money); increasing the price of the retailer brand to equal the manufacturer brand's price has the same effect. The empirical findings in the studies that this article reports support the hypothesis and confirm Scriven and Ehrenberg's [2004. Consistent consumer responses to price changes. Australas. Mark. J. 12(3), 21–39] major conclusion that relative order of price is more important than relative distance.     

Third-Degree Price Discrimination in the Presence of Asymmetric Consumption Externalities

In this paper, we consider third-degree price discrimination in two markets in the presence of asymmetric consumption externalities; we establish that under plausible conditions, a firm reduces its price in the market with low price elasticity of demand. The firm can increase its profits by reducing the price for these consumers and enlarging the demand for other consumers, provided that positive consumption externalities exist. Moreover, we show that third-degree price discrimination enhances not only the firm’s profit but also total consumer surplus.

A macroeconomic model of international price discrimination

This paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international price discrimination by firms. Distributing traded goods to consumers requires nontradables, making the price elasticity of demand country-specific and a function of the exchange rate. Profit-maximizing monopolistic firms drive a wedge between prices across countries, optimally dampening the response of import and consumer prices to exchange-rate movements. We derive general equilibrium expressions for the pass-through into import and consumer prices, tracing the differential impact of real and monetary shocks on marginal cost and markup fluctuations through the exchange rate.     

Consumers’ Shrimp Purchasing Preferences: An Application of Conjoint Analysis

The U.S. shrimp farming industry has been developing in Southern states in response to domestic market demand for shrimp. Shrimp farmers have expressed interest in marketing fresh, whole shrimp directly to consumers. This study employed a mail survey and conjoint analysis to quantify the utility value and relative importance of key, farmer-controlled shrimp attributes: size, refrigeration state, form, and price. Almost all survey respondents (96%) indicated that a member of their household eats shrimp, and 84% purchase shrimp for at-home consumption. The conjoint analysis results suggest that large (26–35 tails per lb. count), fresh, whole shrimp should receive favorable consumer acceptance.     

绿色农产品消费意愿的经济学分析

本文通过对绿色农产品消费者群体的划分,采用指数效用和需求价格弹性等综合性指标来全面深入反映绿色农产品消费意愿。实证结果表明以中青年、文化程度较高和白领职员为主的人群是绿色农产品的主要消费群体。绿色农产品的需求价格弹性较高,消费者对价格比较敏感,绿色农产品对普通农产品的消费替代还不高。在各类农产品中,消费者对绿色蔬菜的需求程度最高。     

Duopolistic Price Competition with Captives

We extend the Bertrand duopolistic competition to include captives. These are consumers that have no choice between the suppliers. Usual population of shoppers are modeled performing a sequential search in order to decide where to buy a homogenous good. These two simple departures from the original setup have sharp consequences. First, we find that duopolistic price competition is not robust to inclusion of captives. The equilibrium results starkly differ and the only possible equilibrium now includes duopolists charging monopolistic prices. Second, addition of sequential search introduces multiplicity of pure strategy Nash equilibria. In this setup, we observe perverse optimal response to competitor's price changes. Notably, we find that the firm might want to reduce the price in response to the competitor's price increase, which is at odds with the usual undercutting principle. Third, we investigate the behavior of equilibrium prices depending on the heterogeneity in consumer risk attitudes. We find that the higher consumer heterogeneity with respect to acceptance of risky gambles leads to higher prices in equilibrium.     

Acceptance of New Food Products: Reference Prices and Psychological Moderators of Heterogeneous Price Effects

This paper emphasizes a consumer-centered perspective to understand new food product success. It pursues two central objectives by showing that consumers are more likely to interpret new product prices as offering gains or losses depending on their individual purchase histories, and consumer psychographics are demonstrated to affect new product adoption directly, and/or moderate effects of prices and promotions as well as quality signalling product attributes. Several hypotheses are generated based on explanations of underlying psychological mechanisms. For data analysis a cross-classified random effects model is applied to household panel data on yoghurt and sausages that includes four crossed random factors. The findings confirm that inclusion of consumer-specific price information is beneficial for understanding new food products’ adoption behavior. Monetary losses as well as gains negatively affect adoption. Purchase habits also hinder adoption while consumer innovativeness is an important driver. Price consciousness and purchase habits moderate price and promotion effects. While price consciousness reinforces negative effects of prices and positive effects of promotions, habits hinder positive effects of promotions. This implies that introductory promotions are an inappropriate strategy for attracting habitual consumers, and managers should identify appropriate target groups in order to improve the efficiency of introductory promotions.     

Balancing Profitability and Customer Welfare in a Supermarket Chain

We investigate the impact of price discrimination by a large Chicago supermarket chain. First we measure the impact of the chain's current zone-pricing policy on shelf prices, variable profits and consumer welfare across its stores. Using the chain's database to simulate a finer store-specific micro-pricing policy, we study the implications of this policy on profits and welfare. We show how a store-pricing policy that is constrained to offer consumers at least as much surplus as a uniform chain wide pricing policy still enables the retailer to generate substantial incremental profits.To ensure our pricing problem exhibits a well-defined optimum, we use the parsimonious, mixed-logit demand function that allows for flexible substitution patterns across brands and also retains a link to consumer theory. We discuss the issue of price endogeneity when estimating the demand parameters with weekly store-level data. Standard instrumental variables techniques used to account for such endogeneity also seem to increase the magnitudes of own-price elasticities thereby offsetting the problem encountered by previous researchers of predicted prices from a demand model exceeding those in the actual data.     

消费者绿色偏好视角下乳制品定价模型研究

在乳制品行业安全质量问题频发的背景下,消费者对于乳制品的绿色偏好程度越来越高,这种偏好会直接影响市场需求和企业生产决策。从消费者绿色偏好出发,将消费者按照绿色等级进行划分,运用均衡价格理论和消费者剩余理论构建了乳制品定价模型。经过数值仿真分析,结果发现,随着区间内消费者比例和消费水平的提高,区间内的需求量也会随之提高;且区间内消费者绿色偏好程度与企业利润呈正相关。     

Whether and to What Extent Consumers Demand Fair Pricing Behavior for Its Own Sake

This article contributes to scholarly understanding of the significance of procedural fairness in pricing contexts. It has been widely recognized that price fairness judgments concern both the outcome (fair price) and the procedure leading to the outcome (fair pricing). However, extant research has traditionally viewed procedural fairness as a means to outcome fairness. According to this instrumental view, procedural fairness is a component or antecedent of outcome fairness, but has no direct effects on consumers’ responses to prices. Building on the relational perspective on fairness, we develop and test a model of price procedural fairness as an end in itself. In three lab studies, we show that (1) when information regarding outcome (an unfavorable price difference) and procedure (the pricing practice underlying the price difference) is available simultaneously and unambiguously, procedural fairness has direct and stronger effects than outcome fairness on consumers’ responses and (2) procedural fairness mediates the effects of pricing practices on these responses. In all three studies, adding procedural fairness as a direct predictor of consumers’ responses increases the explanatory power of a model of price fairness significantly. Our model can explain peculiar real-world cases in which consumers reacted very strongly over relatively small price differences. The research findings point to the significance of the non-instrumental aspect of consumer’s demand for ethical (fair pricing) behavior and the need for companies to assess the fairness of their pricing practices from the consumer perspective.     

Learning About Computers: An Analysis of Information Search and Technology Choice

We estimate a dynamic model of how consumers learn about and choose between different brands of personal computers (PCs). To estimate the model, we use a panel data set that contains the search and purchase behavior of a set of consumers who were in the market for a PC. The data includes the information sources visited each period, search durations, as well as measures of price expectations and stated attitudes toward the alternatives during the search process. Our model extends recent work on estimation of Bayesian learning models of consumer choice behavior in environments characterized by uncertainty by estimating a model of active learning—i.e., a model in which consumers make optimal sequential decisions about how much information to gather prior to making a purchase. Also, following the suggestion of Manski (2003), we use our data on price expectations to model consumers’ price expectation process, and, following the suggestion of McFadden (1989a), we incorporate the stated brand quality information into our likelihood function, rather than modeling only revealed preference data.Our analysis sheds light on how consumer forward-looking price expectations and the process of learning about quality influence the consumer choice process. A key finding is that estimates of dynamic price elasticities of demand exceed estimates that ignore the expectations effect by roughly 50%. This occurs because our estimated expectations formation process implies that consumers expect mean reversion in price changes. This enhances the impact of a temporary price cut. Finally, while our work focuses specifically on the PC market, the modeling approach we develop here may be useful for studying a wide range of high-tech, high-involvement durable goods markets where active learning is important.JEL Classification: C15, C33, C35, C42, C51, C52, D83, D84     

Price Intransparency,Consumer Decision Making and European Consumer Law

Price comparison is a basic element of competition. For comparison to work, at least prices need to be transparent. Moreover, price is usually a focal point in consumer thinking and deciding on transactions. Hence, obfuscating prices can be detrimental to consumers. Therefore, it is vital for policymakers to know how transparent pricing is in reality. Commercial practices involving price intransparency can be detrimental to consumer decision making and may be associated with market failure. So, legislative intervention to ensure price transparency is sometimes warranted. Suppliers may disclose and frame pricing information in such ways as to influence consumers. For some suppliers, advantages may be gained by obfuscating price—through practices ranging from the outright hiding of price terms in the small print to subtle ways of throwing in gifts or adding charges during the vending process. Do consumers appreciate the implications of the fact that by framing price in different ways suppliers actually try to influence their demand for products? And how does the law broadly speaking respond to problems of price intransparency? In this article, behavioural science insights are combined with a legal analysis of European consumer law in order to chart some of the detrimental influences of price intransparency on the consumer decision-making process and to answer whether and to what extent European consumer law addresses these issues. In doing so, this article first reviews research from consumer psychology, marketing, and behavioural law, and economics regarding the influence of presentation, framing, and transparency of price on the consumer decision-making process. Subsequently, it describes and evaluates the legal framework offered by European consumer law and how this framework responds to practices of price intransparency. Particular problematic pricing techniques are identified and discussed. In conclusion, attention is drawn to the disadvantages of the increasing full harmonization character of European consumer law for combating price intransparency at Member State level.     

Television ad-skipping,consumption complementarities and the consumer demand for advertising

Endogenous consumption of advertising is common. Consumers choose to change channels to avoid TV ads, click away from paid online video ads, or discard direct mail without reading advertised details. As technological advances give firms improved abilities to target individual consumers through various media, it is becoming increasingly important for models to reflect the endogenous nature of ad consumption and to consider the implications that ad choice has for firms’ targeting strategies. With this motivation, we develop an empirical model of consumer demand for advertising in which demand for ads is jointly determined with demand for the advertised products. Building on Becker and Murphy (The Quarterly Journal of Economics, 108(4), 941–964 1993)’s ideas, the model treats advertising as a good over which consumers have utility and obtains demands as the outcome of a joint utility maximization problem. Leveraging new data that links household-level TV ad-viewing with product purchases, we provide empirical evidence that is consistent with the model: ad-skipping is found to be lower when a household has purchased more of the advertised brand, and purchases are higher when more ads have been watched recently, suggesting that advertising and product consumption are jointly determined. Fitting a structural model of joint demand to the data, we evaluate consumer welfare and advertiser profitability in advertising targeting counterfactuals motivated by an “addressable” future of TV. We find that targeting on the predicted ad-skip probability is an attractive strategy, as it indirectly selects consumers that value the product. Reflecting the positive view of advertising in the model, we also find that net consumer welfare may increase in several targeting scenarios. This occurs because under improved targeting, firms shift advertising to those who are likely to value it. At the same time, consumers that do not value the ads end up skipping them, mitigating possible welfare losses. Both forces are relevant to assessing advertising effects in a world with improved targeting and ad-skipping technology.     

Retailing to the “grey pound”: Understanding the food shopping habits and preferences of consumers over 50 in Scotland

The number of older people is growing globally and therefore there is an implication for providing products and services to facilitate access to nutritious food, considered fundamental for maintaining health and independence. Historically, older consumers have been unattractive to marketers, however improved finances and lifestyles indicate the “grey pound” has the potential to become lucrative. This exploratory research seeks to identify the current expectation of Scottish older consumers in relation to the products and services available in the supermarket and food retailers. A questionnaire was distributed to participants aged over 50 years in Scotland to voice the opinion of the older consumer in relation to shopping experience and availability of product. The results support previous research indicating the improved lifestyles of older consumers, demonstrating that previous perceptions of older people as impoverished and immobile are not representative of this group. This study contributes to the demand for more information on older consumers׳ food shopping habits and preference in Scotland. It attempts to provide useful recommendations for supermarkets and food retailers in fulfilling the needs of this rising consumer segment. This research concludes that supermarkets could improve access to both products and services to meet the demand from this growing segment of society, through better understanding of their requirements in terms of customer service, shopping experience, product size, price, access and mobility.     

Short brand stories on packaging: An examination of consumer responses

The persuasiveness of stories and their influence on consumers have been acknowledged in marketing, particularly within the advertising field. In marketing practice, brand stories are increasingly also appearing on product packages. However, packages differ from ads in significant ways as communication channels; for example, the space for messages on a package is limited by the size of the package. This study reports findings from two experiments comparing consumer responses to fast‐moving consumer good (FMCG) packages with and without short brand stories. The findings show that even a short brand story included on FMCG packaging has a positive impact on consumers’ affective, attitudinal, product value, and behavioral intention responses to the brand.     

Advertising and Price

The relationship of advertising and price is contentious. In this paper it is shown that advertising can increase demand elasticity, permit the attainment of scale economies, and encourage more efficient methods of distribution. By reference to empirical studies it is further demonstrated that advertising can increase competition and consumer awareness and hence decrease prices and monopoly profits.     

Can fat taxes and package size restrictions stimulate healthy food choices?

Consumers prefer bonus packs, as opposed to price discounts, for healthy foods, but they want a price discount rather than a bonus pack for indulgent foods (Mishra & Mishra, 2011). This study conceptually replicates and extends this finding to show that consumers are more responsive to changes in price than to changes in package size for indulgent food options, whereas they are more responsive to changes in package size than to changes in price for healthy food options.