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Price Elasticity

Research on Magnitude and Determinants


Evelyn Friedel

Price is a fundamental profit driver. It is by far the most sensitive profit lever that managers can influence. Very small price changes translate into enormous changes in profit. Price elasticity indicates how sensitively consumers react to price changes. Not only the knowledge about the magnitude of price elasticity, but also the knowledge about the determinants influencing the price reaction is essential. It is crucial for the development of a successful marketing strategy to understand how price elasticities vary with market and product characteristics. Reflecting the academic and managerial need, the objective of the research is to gain a comprehensive understanding in two main areas, the magnitude of price elasticity and the determinants of price elasticity.
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5 Determinants of Price Elasticity


In a special issue of Marketing Science on empirical generalizations in marketing, Bass/Wind (1995, p. 1) indicate that “science is a process in which data and theory interact leading to generalized explanations of disparate types of phenomena”. They also note that in the last decades few generalized explanations have been produced. One reason for the lack of progress is that there has not been enough empirical research prior to theory development and too much research which is restricted to theory prior to empirical research (Ehrenberg 1995). A common method for reporting research is to formulate hypotheses on the basis of known theory or prior research – theoretical generalization (Blair/Zinkhan 2006, p. 5 f.; Ehrenberg 1995). In understanding the determinants of price elasticities there is little established theory to draw on and previous research has often produced conflicting results (Danaher/Brodie 2000, p. 919; Bijmolt/van Heerde/Pieters 2005; Tellis 1988; cf. also chapter 2.2.2).

The requirement of managerial relevance in generalization is also debated in research discussions (Bass/Wind 1995, p. 2). Generalization is also created through replication. If findings are considered to be central, other researchers will elaborate on them. In the process, if the finding is a coincidence of the sample or else not robust, it will become apparent (Blair/Zinkhan 2006, p. 6). For these reasons, a more explorative empirical approach seems appropriate. Bijmolt/van Heerde/Pieters (2005, p. 154) ask specifically for research that extends the scope and knowledge of price elasticities beyond the range of the current meta-analytic design. Also Blair...

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