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Pricing and Product Positioning with Relative Consumer Preferences

Author

Listed:
  • Roman Inderst
  • Martin Obradovits

Abstract

Frequent price promotions force consumers to continuously reassess their preferences over product offerings. When this leads consumers to exhibit a bias of “relative thinking”, such as may be triggered by a focus only on the most salient product attribute, we show in a model of sales (Varian, H. R., 1980, American Economic Review, 70(4), pp. 651–659) that this profoundly alters firms' pricing and product‐positioning strategies. Vertical differentiation becomes more likely, with firms preferring to occupy the low‐quality space in particular when they have few loyal consumers. More generally, product positioning now depends on the composition of consumers' consideration sets.

Suggested Citation

  • Roman Inderst & Martin Obradovits, 2023. "Pricing and Product Positioning with Relative Consumer Preferences," Journal of Industrial Economics, Wiley Blackwell, vol. 71(3), pages 924-960, September.
    • Handle: RePEc:bla:jindec:v:71:y:2023:i:3:p:924-960
    DOI: 10.1111/joie.12341
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    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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