Limited Choice Sets, Local Price Response, and Implied Measures of Price Competition

TLDR

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 price information of all brands available at point of purchase (global price response). The study proposes a two‑stage choice process—first narrowing to a choice set, then evaluating only those brands within that set—to enable a brand‑level assessment of competitive clout and vulnerability that incorporates local price response. The authors model consumer choice as a two‑stage process: selecting a choice set from the universal set of brands, then comparing only the brands within that set to choose a single brand. They find that price responses are limited to brands in the choice set, and that assuming global price response biases estimates of price elasticity, clout, and vulnerability.

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 price information of all brands available at point of purchase (global price response). The authors 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 and then evaluates only those brands that are in the choice set relative to one another to select a single brand. The authors find 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 (local price response). Their results indicate that employing the assumption of global price response may lead 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, the authors provide a brand-level approach to integrate local price response into the derivation of these measures.