Pricing and Product Positioning with Relative Consumer Preferences

Roman Inderst and Martin Obradovits ()

Journal of Industrial Economics, 2023, vol. 71, issue 3, 924-960

Abstract: Frequent price promotions force consumers to continuously reassess their preferences over product offerings. When this leads consumers to exhibit a bias of “relative thinking”, such as may be triggered by a focus only on the most salient product attribute, we show in a model of sales (Varian, H. R., 1980, American Economic Review, 70(4), pp. 651–659) that this profoundly alters firms' pricing and product‐positioning strategies. Vertical differentiation becomes more likely, with firms preferring to occupy the low‐quality space in particular when they have few loyal consumers. More generally, product positioning now depends on the composition of consumers' consideration sets.

Date: 2023
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https://doi.org/10.1111/joie.12341

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Working Paper: Pricing and Product Positioning with Relative Consumer Preferences (2022)
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