Retailer reactions to competitive price changes

Abstract

Despite the importance of understanding and predicting competitive reactions in oligopoly theory, empirical research on the topic is sparse. We examine whether retail decision-makers' pricing reactions conform to the asymmetric conjecture specified in the classic kinked demand curve theory: that firms will tend to follow competitors' price cuts but not follow price increases. Factors which likely moderate this reaction pattern are discussed and examined via a survey which presents managers with a case study in which they must determine whether or not to respond to a competitor's pricing initiative. The results do generally support the theory's assumption about pricing reactions, but also indicate that reactions are moderated by item price sensitivity and influenced by the behavior of other competitors in the market. Response to price cuts is immediate in some cases, but response to price increases can only be motivated if other competitors follow the initiator first. We consider why these effects vary across products and how market learning may be inhibited by certain reaction tendencies.