Price-Induced Patterns of Competition

Abstract

This research focuses on how price changes influence the observed pattern of brand competition. The paper begins with a basic utility model formulation and examines the implications of three major classes of preference distributions on the expected patterns of competition. A price-tier model is proposed to operationalize the theory and to allow predictive testing. The price-tier model is estimated on 28 brands across four product categories. The results show a specific asymmetric pattern of price competition. Higher-price, higher quality brands steal share from other brands in the same price-quality tier, as well as from brands in the tier below. However, lower-price, lower-quality brands take sales from their own tier and the tier below brands, but do not steal significant share from the tiers above. The results are consistent with a bimodal preference distribution, with the regular price indifference point being located toward the lower-quality end of the preference distribution for the categories analyzed.