Consumer price sensitivity and price thresholds14 14Sangman Han is Associate Professor, School of Business Administration Sungkyunkwan University, 53 3-ga, Myongnyun-dong, Chongno-gu, Seoul (phone: 82-2-760-0456, email: [email protected]). Sunil Gupta is Meyer Feldberg Professor of Business (phone: 212-854-3467, email: [email protected]) and Donald R. Lehmann is George E. Warren Professor (phone: 212-854-3465, email: [email protected]), both at the Graduate School of Business, Columbia University, New York, NY 10027. All correspondence should be directed to Sunil Gupta.

Abstract

We examine consumers' price sensitivity using a new approach that incorporates probabilistic thresholds for price gains and price losses in the reference price models. We model the threshold as a function of company, competitor and consumer specific factors. Model application to scanner panel data for coffee shows that our model is superior in fit compared to ordinary logit and two existing reference price models. Our results indicate that higher own-price volatility makes consumers more sensitive to gains and less sensitive to losses, while intense price promotion by competing brands makes consumers more sensitive to losses but does not influence consumers' sensitivity to gains. Two clear segments that differ in the size of their thresholds emerge. Managerial implications of these results for segmentation and understanding brand power are discussed.