Price-Induced Patterns of Competition

TLDR

The paper begins with a basic utility model that explores how three major preference‑distribution classes affect expected competition patterns. The study investigates how price changes shape brand competition, proposing a price‑tier model to test this theory. The authors estimate this price‑tier model on 28 brands across four product categories to operationalize the theory. The analysis reveals an asymmetric price‑competition pattern: higher‑price, higher‑quality brands capture share from same‑tier and lower‑tier rivals, while lower‑price, lower‑quality brands gain only from their own and lower tiers, consistent with a bimodal preference distribution placing the price indifference point toward the lower‑quality end.

Abstract

This research focuses on how price changes influence the observed pattern of brand competition. The paper begins with a basic utility model formulation and examines the implications of three major classes of preference distributions on the expected patterns of competition. A price-tier model is proposed to operationalize the theory and to allow predictive testing. The price-tier model is estimated on 28 brands across four product categories. The results show a specific asymmetric pattern of price competition. Higher-price, higher quality brands steal share from other brands in the same price-quality tier, as well as from brands in the tier below. However, lower-price, lower-quality brands take sales from their own tier and the tier below brands, but do not steal significant share from the tiers above. The results are consistent with a bimodal preference distribution, with the regular price indifference point being located toward the lower-quality end of the preference distribution for the categories analyzed.