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Title: Limited choice sets, local price response, and implied measures of price competition
Authors: Bronnenberg, Bart J.
Vanhonacker, Wilfried R.
Keywords: Heterogeneity in choice sets
Consumer choice
Threshold models
Price response
Price elasticity
Issue Date: Apr-1995
Series/Report no.: Marketing Working Paper Series ; MKTG 95.040
Abstract: It is becoming increasingly evident that a consumer's brand choice decision in low-involvement categories does not involve full search, evaluation, and comparison of all price information of brands available at point of purchase (global price response). In this context, we propose a two-stage choice process in which the consumer first identifies a subset of brands within the universal set of brands called the choice set. This choice set is created by the consumer to reduce the mental effort associated with the choice decision. Subsequently, the consumer evaluates only those brands that are in the choice set relative to one another to select a single brand. We propose and empirically substantiate that, consistent with reports of the extent of external price search of consumers, response to shelf price variations is limited to the brands in the choice set (referred to as local price response), although price-tier membership may influence choice set formation. Our results strongly indicate that employing the assumption of global price response leads to biased estimates of price elasticity and derived measures of clout and vulnerability. To enable a managerially meaningful and useful assessment of a brand's competitive clout and vulnerability, we provide a brand-level approach to integrate local price response into the derivation of these measures.
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