DP13281 Micro-responses to shocks: Pricing, promotion, and entry

Author(s): Alexis Antoniades, Sofronis Clerides
Publication Date: October 2018
Date Revised: November 2018
Keyword(s): boycotts, demand shock, multi-product firms, Saudi Arabia
JEL(s): L10
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13281

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 <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.