Asymmetric and Neighborhood Cross-Price Effects: Some Empirical Generalizations

Sethuraman, Raj; Srinivasan, V.; Kim, Doyle
March 1999
Marketing Science;1999, Vol. 18 Issue 1, p23
Academic Journal
Abstract This paper provides some empirical generalizations regarding how the relative prices of competing brands affect the cross-price effects among them. Particular focus is on the asymmetric price effect and the neighborhood price effect. The asymmetric price effect states that a price promotion by a higher-priced brand affects the market share of a lower-priced brand more so than the reverse. The neighborhood price effect states that brands that are closer to each other in price have larger cross-price effects than brands that are priced farther apart. The main objective of this paper is to test if these two effects are generalizable across product categories, and to assess which of these two effects is stronger.While the neighborhood price effect has not been rigorously tested in past research, the asymmetric price effect has been validated by several researchers. However, these tests of asymmetric price effect have predominantly used elasticity as the measure of cross-price effect. The cross-price elasticity measures the percentage change in market share (or sales) of a brand for 1% change in price of a competing brand. We show that asymmetries in cross-price elasticities tend to favor the higher-priced brand simply because of scaling effects due to considering percentage changes. Furthermore, several researchers have used logit models to infer asymmetric patterns. We also show that inferring asymmetries from conventional logit models is incorrect.To account for potential scaling effects, we consider the absolute cross-price effect defined as the change in market share (percentage) points of a target brand when a competing brand's price changes by one percent of the product category price. The advantage of this measure is that it is dimension-less (hence comparable across categories) and it avoids scaling effects. We show that in the logit model with arbitrary heterogeneity in brand preferences and price sensitivities, the absolute cross-price effect is s...


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