The dynamics of price elasticity of demand in the presence of reference price effects

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Abstract

The authors derive an expression for the price elasticity of demand in the presence of reference price effects that includes a component resulting from the presence of gains and losses in consumer evaluations. The effect of reference price is most noticeable immediately after a price change, before consumers have had time to adjust their reference price. As a result, immediate-term price elasticity is higher than long-term elasticity, which describes the response of demand long after a price change, when reference price effects are negligible. Furthermore, because of the differential effect of gains and losses, immediate-term price elasticity for price increases and price decreases is not equal. The authors provide a quantitative definition for the terms immediate term and long term, using the average interpurchase time and the discrete "memory" parameter. Practical consequences of the distinction between immediate- and long-term elasticities for the estimation and use of elasticity values are discussed.

Original languageEnglish
Pages (from-to)66-78
Number of pages13
JournalJournal of the Academy of Marketing Science
Volume33
Issue number1
DOIs
StatePublished - 1 Dec 2005

Keywords

  • Immediate term
  • Price elasticity
  • Promotional elasticity
  • Reference price

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics
  • Marketing

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