Abstract
Pricing decision is the most important decision made by food manufacturers. Although products are offered at regular prices most of the time, they are periodically offered at discounted prices to boost sales. In a differentiated product market, how brands respond to each other's price change is not addressed very often empirically. This paper studies a strategic price response to perceive how brands response to each other's prices in the U.S. differentiated yogurt market. This paper also estimates the frequency of price promotion to answer the question of whether private labels go on price promotion less or more frequently than main national brands. Vector autoregressive estimates suggest that the price pattern of yogurt brands is systematic and there is a strategic decision in setting prices. Granger-causality test shows that both Yoplait and private labels alter prices of other brands by having a significant impact on their pricing decision. Results of the impulse response functions confirm that Yoplait with the highest market share is the price leader in the yogurt market where all brands respond significantly to Yoplait's price shock up to five weeks following an impulse. The Markov-switching regression shows that private labels go on price promotion as frequently as national brands.
Highlights
Pricing decision is the most important decision made by food manufacturers since it affects the competitiveness of a brand in the marketplace
The main objective of this study is two-fold: first to empirically estimate strategic price response in a differentiated yogurt market to see if prices of brands are set systematically and second, predict the duration of two price states, regular and promotional, for main brands to see if private labels go on price promotion as frequent as national brands
Data need to be stationary, i.e., means variances and covariances should not depend on time, for the econometric procedure to have the appropriate statistical properties (Adkins and Hill, 2011)
Summary
Pricing decision is the most important decision made by food manufacturers since it affects the competitiveness of a brand in the marketplace. It affects brands’ sales volumes and brands’ profit margins. The saturated distribution channel made food manufacturers to follow competitive pricing strategies in the market. Retailers vary the price of their products to get a higher margin and to stay competitive. Price reduction, offering products at discounted prices periodically, is considered the most common type of marketing tactic among a large variety of promotional offers. Price reduction will naturally boost short term sales. In addition to the type of promotion, the distribution channels’ strategic marketing decision addresses the timing, frequency, and depth of the promotions (Kumar and Pereira, 1997)
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