The Asymmetric Share Effect: An Empirical Generalization on Absolute Cross-Price Effects

V. "Seenu" Srinivasan and Raj Sethuraman
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V. "Seenu" Srinivasan: Stanford U
Raj Sethuraman: Southern Methodist U

Research Papers from Stanford University, Graduate School of Business

Abstract: Past empirical literature states that asymmetry in cross-price effect favors the large-share brand. That is, when large-share brands discount, they have a greater impact on small-share brands than the reverse. This conclusion is based on consideration of cross-price elasticities. This paper points out that focusing on cross-elasticities for measuring asymmetry is inappropriate for assessing incremental profitability from price promotions. Instead, we should investigate asymmetries in absolute cross-price effects (i.e., change in market share of a competing brand for a unit price change of the focal brand). We theoretically and empirically demonstrate that asymmetry reverses when absolute cross-price effect is considered. That is, the absolute cross-price effect of a price reduction of a lower-share brand on the market share of a higher-share brand is greater than the reverse. The general intuition is that a small-share brand has a greater pool of consumers to draw from when it discounts than does a large-share brand. The implications of the findings and future research directions are discussed.

Date: 2000-11
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