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Pricing and Product Positioning with Relative Consumer Preferences

Author

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  • Inderst, Roman
  • Martin, Obradovits

Abstract

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.

Suggested Citation

  • Inderst, Roman & Martin, Obradovits, 2022. "Pricing and Product Positioning with Relative Consumer Preferences," CEPR Discussion Papers 16949, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16949
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    Keywords

    Relative thinking; Product positioning; Vertical differentiation; Promotions; Sales; Price competition;
    All these keywords.

    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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