Asymmetric and neighborhood cross-price effects: Some empirical generalizations

This paper provides some empirical generalizations regarding how the relati ve prices of competing brands affect the cross-price effects among them. Pa rticular focus is on the asymmetric price effect and the neighborhood price effect. The asymmetric price effect states that a price promotion by a hig her-priced brand affects the market share of a lower-priced brand more so t han the reverse. The neighborhood price effect states that brands that are closer to each other in price have larger cross-price effects than brands t hat are priced farther apart. The main objective of this paper is to test i f these two effects are generalizable across product categories, and to ass ess which of these two effects is stronger. While the neighborhood price effect has not been rigorously tested in past research, the asymmetric price effect has been validated by several researc hers. However, these tests of asymmetric price effect have predominantly us ed elasticity as the measure of cross-price effect. The cross-price elastic ity measures the percentage change in market share (or sales) of a brand fo r 1% change in price of a competing brand. We show that asymmetries in cros s-price elasticities tend to favor the higher-priced brand simply because o f scaling effects due to considering percentage changes. Furthermore, sever al researchers have used legit models to infer asymmetric patterns. We also show that inferring asymmetries from conventional legit models is incorrec t. To account for potential scaling effects, we consider the absolute cross-pr ice effect defined as the change in market share (percentage) points of a t arget brand when a competing brand's price changes by one percent of the pr oduct category price. The advantage of this measure is that it is dimension less thence comparable across categories) and it avoids scaling effects. We show that in the legit model with arbitrary heterogeneity in brand prefere nces and price sensitivities, the absolute cross-price effect is symmetric. We develop an econometric model for simultaneously estimating the asymmetri c and neighborhood price effects and assess their relative strengths. We al so estimate two alternate models that address the following questions: (i) If I were managing the ith highest priced brand, which brand do I impact th e most by discounting and which brand hurts me the most through price disco unts? (ii) Who hurts whom in National Brand vs. Store Brand competition? Based on a meta-analysis of 1,060 cross-price effects on 280 brands from 19 different grocery product categories, we provide the following empirical g eneralizations: 1. The asymmetric price effect holds with cross-price elasticities, but ten ds to disappear with absolute cross-price effects. 2. The neighborhood price effect holds with both cross-price elasticities a nd absolute cross-price effects, and is significantly stronger than the asy mmetric price effect on both measures of cross-price effects. 3. A brand is affected the most by discounts of its immediately higher-pric ed brand, followed closely by discounts of its immediately lower-priced bra nd. 4. National brands impact store brands more so than the reverse when the cr oss-effect is measured in elasticities, but the asymmetric effect does not hold with absolute effects. Store brands hurt and are, in turn, hurt the mo st by the lower-priced national brands that are adjacent in price to the st ore brands. 5. Cross-price effects are greater when there are fewer competing brands in the product category, and among brands in nonfood household products than among brands in food products. The implications of these findings are discussed.