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Micro-responses to shocks: Pricing, promotion, and entry

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  • Alexis Antoniades
  • Sofronis Clerides

Abstract

We study the response of markets to a firm-specific shock in a natural experiment setting. In 2006, a boycott of Danish products in several Arab countries was devastating for Danish cheese firms. In Saudi Arabia their market share collapsed from 16.5% in January to less than 1% in March and never fully recovered: it was 6.3% in 2009. By analyzing micro-level (scanner) price and expenditure data we find that (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; and (iii) non-Danish firms chose to introduce products that were identical to the Danish in order to compete head-to-head. The finding that Danish firms adjusted to the negative demand shock through the intensive margin and non-Danish to the positive through the extensive is hard to reconcile with existing pricing theories or theories on multi-product firms. We offer two potential explanations that can help reconcile our findings with existing models.

Suggested Citation

  • Alexis Antoniades & Sofronis Clerides, 2018. "Micro-responses to shocks: Pricing, promotion, and entry," University of Cyprus Working Papers in Economics 16-2018, University of Cyprus Department of Economics.
    • Handle: RePEc:ucy:cypeua:16-2018
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    More about this item

    Keywords

    boycotts; multi-product firms; demand shock; Saudi Arabia;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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