Competitive Pricing Strategies Research Articles

Empirical Analysis of Competitive Pricing Strategies with Complementary Product Lines

We build an econometric model of a household's purchase incidence and brand choice decisions in complementary product categories to account for cross-category dependence in demand. Complementarity is modeled as the additional utility that a household derives from the joint consumption of brands in complementary categories. We estimate the proposed multi-category demand model using scanner panel data on cake mix and frosting categories. Using the estimated demand model as an input, we investigate whether the observed retail prices in the two categories are consistent with joint-category profit maximization behavior on the part of the retailer. We also investigate whether manufacturers' pricing behavior is consistent with maximizing the sum of profits from their brands (bearing the same umbrella name) in both complementary categories. Lastly, we investigate the nature of vertical channel interactions between the manufacturers and the retailer. We find that our proposed multi-category demand model fits households' purchasing outcomes better than traditional single-category demand models (which yield significantly under-stated within-category price elasticities). While each brand in one category is a complement for every brand in the other category, the cross-category complementarity and cross-category price elasticity are found to be strongest with respect to the umbrella brand name in the other category. We find that the data are consistent with joint-category profit maximization behavior by the retailer across the two categories, and with a Vertical Nash game between the retailer and the manufacturer. Finally, we find that the data are consistent with a Bertrand-Nash pricing game among manufacturers maximizing the sum of their brands' profits in the two categories. In fact, joint-category profit maximization is found to be a dominant strategy for each manufacturer.

Marketing margins and price transmission on the Hungarian pork meat market

AbstractThe analysis of vertical price relationship along the supply chain from producers to consumers has become a popular tool of evaluating the efficiency and degree of competition in agrifood systems over recent decades. There is a wealth of literature on the farm‐retail price spread for different commodities and countries. However, with one exception (Bojnec, 2002) none have studied price transmission and marketing margins in the transition economies. It is a common belief that because of the distorted markets inherited from the pre 1989 period, the deficiency of the price‐discovery mechanisms, and unpredictable policy interventions, marketing margins are generally larger in the transition economies than in competitive markets. Using cointegration analysis, we find that producer and retail pork meat prices are cointegrated, the retail prices entering the cointegration space as weakly exogenous variables. Structural tests imposing homogeneity conditions are carried out and show a competitive pricing strategy. Price transmission modeling suggests that, despite the common belief, price transmission on the Hungarian pork meat market is symmetric. [JEL classification: Q13, D12, D4.] © 2005 Wiley Periodicals, Inc. Agribusiness 21: 273–286, 2005.

Learning competitive pricing strategies by multi-agent reinforcement learning

In electronic marketplaces automated and dynamic pricing is becoming increasingly popular. Agents that perform this task can improve themselves by learning from past observations, possibly using reinforcement learning techniques. Co-learning of several adaptive agents against each other may lead to unforeseen results and increasingly dynamic behavior of the market. In this article we shed some light on price developments arising from a simple price adaptation strategy. Furthermore, we examine several adaptive pricing strategies and their learning behavior in a co-learning scenario with different levels of competition. Q-learning manages to learn best-reply strategies well, but is expensive to train.

Augmenting Conjoint Analysis to Estimate Consumer Reservation Price

Consumer reservation price is a key concept in marketing and economics. Theoretically, this concept has been instrumental in studying consumer purchase decisions,competitive pricing strategies,and welfare economics. Managerially,knowledge of consumer reservation prices is critical for implementing many pricing tactics such as bundling,tar get promotions,nonlinear pricing,and one-to-one pricing,and for assessing the impact of marketing strategy on demand. Despite the practical and theoretical importance of this concept, its measurement at the individual level in a practical setting proves elusive. We propose a conjoint-based approach to estimate consumer-level reservation prices. This approach integrates the preference estimation of traditional conjoint with the economic theory of consumer choice. This integration augments the capability of traditional conjoint such that consumers' reservation prices for a product can be derived directly from the individuallevel estimates of conjoint coefficients. With this augmentation,we can model a consumer's decision of not only which product to buy,but also whether to buy at all in a category. Thus, we can simulate simultaneously three effects that a change in price or the introduction of a new product may generate in a market: the customer switching effect,the cannibalization effect,and the market expansion effect. We show in a pilot application how this approach can aid product and pricing decisions. We also demonstrate the predictive validity of our approach using data from a commercial study of automobile batteries.

Craft Retailers’ Criteria for Success and Associated Business Strategies

This research was designed to fill the void in understanding how art–related retailers define and achieve success. A two–phase data collection process was implemented. Preliminary personal interviews were conducted with 12 craft retailers followed by a mailed survey to 1000 craft retailers in nine southeastern U.S. states. Factor analysis was employed to reduce the number of items for defining success. Cluster analysis followed to develop empirical groupings of craft retail businesses based on the success factor scores, of which four different groups were identified. Multivariate analysis of variance (MANOVA) and analysis of variance (ANOVA) were used to compare retail clusters related to business strategy variables of competitive strategies, product assortment, pricing, and distribution strategies, and networking activities. Significant differences were found in the craft retailers’ business strategies used to achieve success. Craft retail entrepreneurs were found to define success with both traditional criteria such as profit and growth and also with intrinsic factors such as personal satisfaction and the opportunity to elevate the craft tradition. Successful small craft retail firms offered more focused product assortments of specialized craft products, implemented more differentiated strategies of stocking unique crafts in their assortments, as well as offering unique services to educate consumers about crafts, craft artisans, and a region’s culture. Craft retailers who reported greater success did not engage in competitive pricing. Collaborative strategies included networking among family, friends, and business peers.

The Restaurant Revolution-Growth, Change and Strategy in the International Foodservice Industry

Summary This paper reports the results of a two-year investigation into the forces driving change in the global foodservice industry and the identification and analysis of competitive methods used by multinationals to respond to these forces. The five forces identified are: (1) globalization and economic change, (2) a knowledge based environment, (3) the future labor force and its entrants, (4) concern for well being, and (5) threatened natural resources. The competitive methods as identified by analyzing multinational foodservice firms are: (1) strategic expansion into the international marketplace, (2) investment in technological development, (3) internal competency development, (4) effective communication to target markets, and (5) competitive pricing strategies. Using the co-alignment model of strategy as the underpinning of the analysis it was determined that multinational firms have responded well to the forces of globalization and economic change, and the knowledge based environment. However, it appears that little competitive methods have been developed to address the forces such as labor force, well being and threatened natural resources. The implication here is that firms that are not in alignment with environmental forces will have to address this concern if they expect to continue to add value for all industry stakeholders.

Toward an understanding of price wars: Their nature and how they erupt

This paper aims to improve our understanding of the unique phenomenon of market competition, called price wars, as little is known about their nature and how they erupt. More precisely, we offer selected illustrations of the reality of price wars, identify key attributes of price wars, propose a definition of price wars, and offer a conceptual framework in which early warning signals (EWSs) of price wars are distilled and linked to the likelihood and the intensity of such wars. Also, initial empirical findings on some of the effects of price wars are offered, showing that price wars inflict substantial damage on the companies involved. Implications for researchers entail that numerous research opportunities exist to better understand price wars and to eventually develop a theory of price wars that may become a vital part of a firm's portfolio of competitive pricing strategies.

Industrial Pricing: Theory and Managerial Practice

We organize the existing theoretical pricing research into a new two-level framework for industrial goods pricing. The first level consists of four pricing situations: New Product, Competitive, Product Line, and Cost-based. The second level consists of the pricing strategies appropriate for a given situation. For example, within the new product pricing situation, there are three alternative pricing strategies: Skim, Penetration, and Experience Curve pricing. There are a total of ten pricing strategies included in the framework. We then identified a set of cost, product, market, and information conditions which determine what pricing situation(s) a firm is facing as well as which strategies are appropriate within a given situation. Some of these determinant conditions are common to many pricing strategies (e.g., highly elastic demand) while others are unique to a given strategy within a particular pricing situation. For example, within the product line situation, the profitability of supplementary sales is a unique determinant of the Complementary Product pricing strategy (razor-and-blade pricing). Using this framework as a basis for an empirical study, we examined how well current industrial pricing practice matches the prescriptions from the existing research. Our sample consisted of 270 respondents (27% response rate). Of these, more than 50% indicated that they used more than one pricing strategy in formulating their most recent pricing decision for a high-value industrial product sold in the United States. As in previous research, Cost-Plus pricing was the most often cited pricing strategy (56% of the respondents). Since the respondents were able to indicate their use of more than one pricing strategy, the data are of the “pick k from n” variety. In order to model the managers' pricing strategy choices, we constructed a “stacked” binary logit with a separate observation for each strategy within a given pricing situation. The signs of the determinant variables were estimated as interaction terms. The new product pricing strategies (skim, penetration, experience curve) were used for new models in the market. Skim pricing was used in markets with high levels of product differentiation by firms at a cost disadvantage due to scale. Penetration pricing was used by firms with a cost advantage due to scale in markets with high level of overall elasticity but low brand elasticity. Experience curve pricing was used for minor innovations by firms with low capacity utilization in markets with a high level of differentiation. The competitive pricing strategies (Leader, Parity, and Low-price Supplier) were used in mature markets. Parity pricing was used by firms in a poor competitive situation, i.e., high costs, low market share, low product differentiation. These firms were also unable to take advantage of high levels of elasticity since their capacity utilization was high. In contrast, the low-price supplier strategy was used by firms with low costs due to scale advantages. Since they have low utilization, these firms can take advantage of elastic brand demand. None of the determinants were significantly related to the choice of leader pricing. Product line pricing strategies (Bundling, Complementary Product, and Customer Value pricing) were more likely to be used by firms which sell substitute or complementary products. Bundle pricing was used for per-sale/contract pricing in markets with high levels of brand elasticity. Complementary product pricing (razor-and-blade) was used by firms that enjoyed high profitability on its supplementary sales. Using customer value pricing, a firm offers a stripped down version of its current products to appeal to more price sensitive segments or to leverage new distribution channels. This strategy was used to target a narrow segment in high growth markets where price changes are difficult to detect. Cost-based pricing was more likely to be used in markets where demand is very difficult to estimate. In such a situation, cost-based pricing makes a great deal of sense. In general, the results show that the managers' pricing strategy choices are consistent with normative pricing research. However, questions about how managers combine their strategies to arrive at a final price as well as the organizational influences on pricing strategies remain important areas for future research.

Evaluation of Aggressive Competitive Pricing Strategies

The main contribution of this paper is a method that allows one to study the effects of different degrees of competition. We find that optimal prices and profits are more sensitive to cooperative than to aggressive behavior on the part of competitors. With more aggressive policies, the average pricing level decreases and the average difference between high and low prices increases. An empirical model of the detergent market illustrates the methodology.

Determining the processing cost of a skin biopsy specimen.

An integral part of directing a pathology laboratory is to understand the nature and behavior of relevant costs. Until recently, pathologists did not need to accurately know the specific costs assigned to various steps in the processing of tissue specimens. With the advent of a more competitive approach to the delivery of health care, laboratory directors must accurately cost their product in order to use competitive pricing strategies. In this article, I review the principles that are used to analyze costs that are identified in a typical dermatopathology laboratory.

Dynamic competitive pricing strategies

Pricing decisions have long been of interest to researchers in the competitive strategy area. Static game theory models of competitive pricing commonly assume that rivals act with full information and full rationality. Such models imply that rivals immediately reach a Nash equilibrium. This implication is consistent neither with experimental research results nor with casual observation of real markets. We therefore relax the assumption of full information to investigate how competitors learn and update their marketing strategies over time, as well as to identify the ultimate equilibrium they reach. This dual focus on the learning process as well as its outcome is important to understanding how rivals compete over time. We find that the ultimate equilibrium takes some time to reach, and is neither the standard Nash solution nor a collusive one. These differences from the usual static game solutions suggest the value of models that better capture the incomplete information facing a firm in a competitive marketplace.