A dynamic model of the advertising-price sensitivity relationship for heterogeneous consumers

The Effect of Consumer Participation on Price Sensitivity

“…Similarly, given the same level of relationship building, information exchange, and intervention, industries typically characterized by higher participation have lower consumer price sensitivity than those typically characterized by lower participation.Firms should be interested in maintaining low consumer price sensitivity since it enhances their ability to extract price premiums that stand to improve their long-term profitability (Shankar and Krishnamurthi 1996). The effect of several different factors on price sensitivity has already been studied, including: the effect of consumer satisfaction (Anderson 1996); the effect of brand loyalty (Krishnamurthi and Raj 1991); the effect of reference price, purchase frequency, and brand loyalty (Kalyanaram and Little 1994); and the effect of advertising (Kalra and Goodstein 1998;Krishnamurthi and Raj 1985;Papatla 1995;Wittink 1977). The first three studies cited above focused on the effect of consumers' post-purchase experience on price sensitivity, whereas the latter ones focused on the effect of consumers' pre-purchase experience on price sensitivity.…”

Non-Price Competition, Real Rigidities and Inflation Dynamics

“…37 Popkowski-Leszczyc and Rao (1989), using bimonthly data at the brand level of non-durable consumption goods, provide evidence in favor of a negative relationship between price elasticity and non-price advertising. Papatla (1995), using scanner panel data for liquid detergents and yogurt, provided evidence supporting the view that advertising increases product differentiation and thus decreases the sensitivity to the price of advertised brands. More recently, Iwasaki et al (2008) used firm-level data for the US brewing industry and industry-level data for the US cigarette industry and found that advertising (essentially of non-price nature) raises prices and market power in these markets.…”