Optimal price promotion in the presence of asymmetric reference-price effects

Gadi Fibich, Arieh Gavious, Oded Lowengart*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

37 Scopus citations

Abstract

In this study we demonstrate how a reference price may affect the degree of price rigidity/flexibility. For this, we construct a model of reference-price formation, which we use to analyze the effect of asymmetric reference price (cut 'effects') on the profitability of price promotions. We derive explicit expressions for the additional profits earned during a promotional period due to consumer perception of a 'gain', and for the post-promotion loss of potential profits due to consumer perception of a 'loss'. We show that when effects of losses on demand are greater than effects of gains ('loss aversion'), price promotions always lead to a decline in profits. When, however, effects of gains are larger than those of losses, price promotions, as well as reverse price promotions (i.e. price increase) can be profitable. In the latter case we calculate the optimal depth and duration of a price promotion. We also show that reference price can affect price rigidity and flexibility.

Original languageEnglish
Pages (from-to)569-577
Number of pages9
JournalManagerial and Decision Economics
Volume28
Issue number6
DOIs
StatePublished - Sep 2007

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