DP16949 Pricing and Product Positioning with Relative Consumer Preferences

Author(s): Roman Inderst, Obradovits Martin
Publication Date: January 2022
Keyword(s): price competition, Product Positioning, promotions, Relative thinking, Sales, vertical differentiation
JEL(s): D11, D22, L11, L15
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16949

Especially in markets with frequent price promotions, where consumers constantly have to form preferences over changing offers, product choice may depend on a relative assessment of prices and qualities. We show how such "relative thinking" profoundly influences firms' pricing and product-positioning strategies, compared to a benchmark with standard preferences. When competition is sufficiently intense, firms want to differentiate in the quality space, and they may find it advantageous to occupy the lower end of the quality spectrum. Such a strategy pays off particularly for firms with a small base of loyal customers, which then compete more aggressively for shoppers.