Asymmetric and Neighborhood Cross-Price Effects: Joint Estimation for Testing Empirical Generalizability

This paper provides some empirical generalizations regarding how the relative prices of competing brands affect the cross-price effects between them. Particular focus is on the asymmetric price effect, which states that the price promotion by a higher-priced brand affects the market share of a lower-priced brand more so than the reverse, and the neighborhood price effect, which states that brands that are closer to each other in price have larger cross-price effects than brands that are priced farther apart. In addition to the conventional cross-price elasticity measure, we consider the absolute cross-price effect, defined as the change in market share (percentage) points of a target brand when a competing brand’s price changes by one-percent of the product category price. We show that there is an inherent bias in favor of asymmetry in cross-price elasticities and point out the need for analyzing absolute cross-price effects as well._x000B__x000B_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 generalizations:_x000B__x000B_-The asymmetric price effect holds with cross-price elasticities, but tends to disappear with absolute cross-price effects._x000B_-The neighborhood price effect holds with both cross-price elasticities and absolute cross-price effects, and is significantly stronger than the asymmetric price effect on both measures of cross-price effects._x000B_-A brand is affected the most by discounts of its immediately higher-priced brand, followed closely by discounts of its immediately lower-priced brand._x000B_-National brands impact store brands more so than the reverse when the cross-effect is measured in elasticities, but the asymmetric effect does not hold with absolute effects. Store brands hurt and are, in turn, hurt the most by the lower-priced national brands that are adjacent in price to the store brands._x000B_-Cross-price effects are greater when there are fewer competing brands in the product category, and among brands in non-food household product categories than among brands in food products._x000B__x000B_The implications of the findings are discussed.