Micro-responses to shocks: pricing,promotion, and entry*

We study the market response to firm-specific demand shocks in a natural experiment setting. In 2006, a boycott of Danish products in several Arab countries was devastating for Danish cheese products firms. In Saudi Arabia, their market share collapsed from 16.5 percent in January to below 1 percent in March, and never fully recovered; by 2009, it was 6.3 percent. By analyzing micro-level (scanner) price and sales data, we find the following. (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. (iii) Non-Danish firms chose to introduce products that were similar to the Danish products in characteristic space in order to compete head-to-head. We complement the analysis with a theoretical framework that helps to account for our main findings.