The dynamics of price elasticity of demand in the presence of reference price effects

  • Gadi Fibich
  • Arieh Gavious
  • Oded Lowengart
Article

Abstract

The authors derive an expression for the price elasticity of demand in the presence of reference price effects that includes a component resulting from the presence of gains and losses in consumer evaluations. The effect of reference price is most noticeable immediately after a price change, before consumers have had time to adjust their reference price. As a result, immediate-term price elasticity is higher than long-term elasticity, which describes the response of demand long after a price change, when reference price effects are negligible. Furthermore, because of the differential effect of gains and losses, immediate-term price elasticity for price increases and price decreases is not equal. The authors provide a quantitative definition for the terms immediate term and long term, using the average interpurchase time and the discrete “memory” parameter. Practical consequences of the distinction between immediate- and long-term elasticities for the estimation and use of elasticity values are discussed.

Keywords

Reference price price elasticity immediate term promotional elasticity 

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Copyright information

© Academy of Marketing Science 2005

Authors and Affiliations

  • Gadi Fibich
    • 1
  • Arieh Gavious
    • 2
  • Oded Lowengart
    • 2
  1. 1.Tel Aviv UniversityTel AvivIsarel
  2. 2.Ben Gurion UniversityIsrael

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