Testing for the existence of price points and price thresholds in retail scanner data using microeconomic theory.

摘要

Different zones of price insensitivity of consumers cause discrepancies in the demand function. Demand discrepancy in general is defined as discontinuous price responses at specific points on the demand curve. Reference prices, loss aversion, latitude of price acceptance, sticky price response, advertisement and promotional effect, price-endings, price discounting by the consumer, and retailers' pricing behavior are some of the concepts used to explain demand discrepancies.; In a theoretical framework, demand discrepancies can be explained using the concept of price points and price thresholds. Price points are defined as specific points on the demand curve where the consumer response causes kinks and flat ranges or discontinuities in demand. Price points and price thresholds can dramatically impact the pricing strategy and profitability of wholesalers and retailers and directly influence the price sensitivity estimates.; The theoretical appropriateness of the demand system is validated by estimation of the rank of demand system, system test of exogeneity of prices, and imposing theoretical demand restrictions.; A globally flexible functional form that can account for kinks and flat ranges in the demand curve was used to estimate the demand system. To ensure econometric consistency of the demand system, a sequence of joint conditional mean tests (functional form, parameter stability, and independence) and joint conditional variance tests (static heteroskedasticity, dynamic heteroskedasticity, and error variance structure) were performed.; The procedure developed in this study was illustrated using fluid milk weekly retail scanner data from Buffalo and Boston.; Elasticity estimates were consistent with the results reported in previous studies carried out using the data pertaining to the period used in this study. Although the results of the analysis identified significant price points and thresholds in the demand for fluid milk for Boston and Buffalo, the magnitude of the impact is too low to be of any relevance to the retailers. Low magnitude of the impact of price points on demand could be due to nonstorability of fluid milk. Ignoring price points does not seem to have any potential impact on the profitability of the retailers in the case of fluid milk products.