A Competitive Pricing Model Author(s): Hani I. Mesak and Richard C. Clelland Source: Management Science, Vol. 25, No.

11 (Nov., 1979), pp. 1057-1068 Published by: INFORMS Stable URL: http://www.jstor.org/stable/2630407 . Accessed: 15/08/2011 07:26
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MANAGEMENT SCIENCE Vol. 25, No. 11, November 1979 Printed in U.S.A.

A COMPETITIVE PRICING MODEL*

HANI I. MESAKt AND RICHARD C. CLELLANDT This paper is principally concerned with the development of a competitive pricing model aimed at predicting the impact of a vector of price increases on sales of a given brand of a low priced, frequently purchased product. The model has its base in a set of assumptions describing the purchasing behavior of the individual consumer. A method for testing the model against empirical data is described and illustrated. The competitive pricing model is found to perform somewhat better than a simple regression model in the application reported. (MARKETING-PRICING; MARKETING-BUYER BEHAVIOR)

1. Introduction There is a significant body of literature that emphasizes both the importance of price in purchase decisions and our incomplete understanding of how it influences these decisions. Various parts of the relationships involving price, quality, perceived quality and purchase have been studied [1], [4], [6]-[11], [14]-[17]. Important summary articles have been written by Emery [3] and Oxenfeldt [12]. Central to these studies is the relationship between the price of a purchased item and its quality. However, none of them developed a model of reaction to price increase on the level of the individual consumer based on these two factors. This paper presents such an explicit model and illustrates procedures for testing its performance. It is thought to be useful only in connection with low priced, frequently purchased items. 2. Behavioral Assumptions

Consider only units that are standard size packages of a low priced, frequently purchased item. Assume that all consumers can afford to purchase any brand of the unit.' The customer then divides the brands into acceptable and not acceptable categories on the basis of a comparison of perceived value against price. Final choice is made from those brands deemed acceptable. Also assume that the consumer has used this process sufficiently often to have a regular brand-one that is usually purchased. Let pi = unit price of the ith brand. This is the price paid by the consumer for a standard package of the ith brand. p' = unit perceived value of the ith brand. This is the maximum price the consumer would pay for a standard package of the ith brand if it were the only brand available in the market. A = the set of all acceptable brands. DEFINITION1. Brand i is called acceptable if p' - pi > 0, that is, if the consumer's perceived net gain is nonnegative. DEFINITION 2. Brand I is said to be more attractive2 than brand k if p - pi > pk Pk' 1, k E A.
* Accepted by George H. Haines, Jr.; received December 20, 1977. This paper has been with the authors 19 months for 3 revisions. tKuwait University, State of Kuwait. $ University of Pennsylvania. 'Rejection of the assumption that all consumers can afford to purchase any brand of the unit leads to an additional node in the behavioral decision tree. 2The term "attractive" without a qualifier is undefined. 1057 0025-1909/79/251 1/1057$0t1.25 Copyright ? 21980, The Institute of Management Sciences

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HANI I. MESAK AND RICHARD C. CLELLAND

DEFINITION 3. If brand j is the regular brand of the consumer, that is, the brand purchased most often, then it is the most attractive brand in A; that is, Max (p' -pi) =pj -pj.

In this situation we say that brand j is stable. The consumer's decision process, in more explicit form, first discards those brands found unacceptable according to Definition 1. Then the consumer compares possible alternatives according to Definition 2 and finally selects one brand from the acceptable set according to Definition 3. This process is a reasonable description of consumer behavior although, of course, it is easy to indicate other descriptions. Note that Pk < p, is unusual for low priced, frequently purchased items, so that a purchase decision based on Definitions 2 and 3 is an appropriate model component. 4. The stability index ACj of the regular brand j is given by DEFINITION
A Cj = Min

[ (PJ -p.)

- (p'-i

A.

ACj, in other words, is the amount of increase in the price of the regular brand j necessary to make some other brand in A more attractive than brandj so that a brand switch will occur. The definition of this concept is similar to that used by Pessemier et al. [13]. The concept of standby brand is related to the stability index: DEFINITION 5. Brand x is the standby brand for a consumer having brand j if ( - P.)- (Px
px) = MiM7n(Pj -Pj) [ -(Pi-Pi) I] ig jg E A

A consumer's standby brand x is that brand that will be most attractive when only the price of brand j is increased by an amount larger than A Cj, the stability index of the brand-assuming that the perceived value of brandj will not be changed as a result of the price increase. We next give a detailed description of consumer behavior in response to increases in the price of a regular brand and of competing brands. 3. Consumer Behavior in Response to a Vector of Price Increases

Consider a situation in which the prices of all brands have been raised by a vector Ap which is small compared to the vector of original prices p. For the low priced, often purchased items, it seems reasonable to assume that perceived values of all the brands will not be changed. This assumption of the independence of P' and Ap is, of course, a major simplification and one reason why this model does not generalize to all consumer products. Assume, for simplicity, that A, the set of acceptable brands for a given consumer, contains only two brands, the consumer's regular brandj and standby brand x. Then according to the argument of the previous section, the consumer behavior will be one of three types after the price increases.3 Behavior 1. The consumer will not switch from brand] to brand x if either of the following situations hold. (1) Brand j is acceptable, but brand x is not: Apn < p, -pi, Apx > Px-px or (2) Brands j and x are both acceptable, and brand is stable: Apn< pj -p., . Ap1 -APX < A C) APX< Px-PX I
3This simplifying assumption is not restricting. Consumer behavior in response to price increases can be derived from the structure of the previous section when A contains more than two brands.

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Behavior 2. The consumer will switch from brand j to brand x if either of the following two situations holds. (1) Brand x is acceptable, but brand j is not: Apx < p' -p ; Ip1 >pJ -p1 or (2) Brands j and x are both acceptable, but brand j is not stable: p. < pi,-'pi, - Apx > AC). Apx < PX-Px Behavior 3. The consumer will drop the product altogether if both brands ] and x are not acceptable: Ap. > pJ -p, Apx > Px-PX The model, under behavior 3, considers the consumer to have switched to a fictitious brand, brand o. It follows from these descriptions that stability indices of brand choice, when obtained from a price increase in the regular brand only, can be used to predict consumer behavior when the prices of all brands are raised. 4. A Competitive Pricing Model

Next a model is developed for predicting the expected percentage gain in sales for a particular brand following a price increase. First individual consumer behavior under the assumptions of the previous section is described, and then the results are aggregated. First consider the case where A contains only a regular brand j and a standby brand x. Use the three behaviors specified in the preceding section, and consider the consumer to have switched to the fictitious brand o under Behavior 3. Then the probabilities that, after a price change, a consumer who has regular brand] will continue to select brand j, switch to brand x or drop the product can be written as
pr(jj)
=

pr(pj' -p

> APn,px -px

< Lpx)

+ pr(pJ -p1 > Ap1,PX-pX > ApX, > LCAjx '\pj pr(jx)
=

Px)

pr(pj -p1 < Apj, px-px

+ pr( pJ-Pj

> Apx) A > Apx, Cjx< Apj- Apx) and < Apx)

>

APj Spx

pr(jo)

pr(pj -p1 < Apj, px-px

Price increases for low priced, frequently purchased items tend to be small. Price increases have averaged about 5 percent of previous price over a ten-year period and never exceeded ten cents in the case of the particular product used in the illustration given later in this paper. Therefore, it is not unreasonable to assume that all brands that were acceptable before price increases will be acceptable afterwards. Under this additional assumption, the set for which Apn> pJ.- p will be empty as will the set for which Apx > px - px. Accordingly, pr(jx)
=

pr(/ACjx

<

Apj

Ap)

(1)

Similarly, the probability that a consumer switches from a regular brand y to a standby brandj is given by pr(yj) = pr(ACyj< APY- APj) pr(jo) = 0. and (2) (3)

Now, given this exposition, it is appropriate to return to the general situation of several competing brands. The approach used in predicting the expected gain (or loss) of brandj, the brand of interest, will be to compare the expected consumptiom of brand ] from consumers

1060

HANI I. MESAK AND RICHARD

C. CLELLAND

that have this brand as their regular brand during a given time period of length To with the expected consumption of brandj from these consumers in a second period of length T0 after all the price increases have occurred. Consider all brands of the product having a standard package. This consists of brandj, the set Ujl of brands numbering njl that "steal" sales from brandj when only brand] raises its price, and the set U)2of brands numbering nf2 from which brandj "steals" when these brands raise their prices and brandj does not. That is, each brand in Uj2 has j as a standby for certain consumers. Let Uj = Ujl U Uj2. Note that a quantity like ACj is a random variable when taken over the universe of all regular consumers of brandj. The following notation is used: kx(AC) = the probability density function of ACj for consumers with regular brand and standby brand x. j fyj(ACY) = the probability density function of ACY for consumers with regular brand y and standby brand j. ={]} U Uj. sj= {j} U L{U J2 = the expected number of consumers that purchase the product during a period Njx of time To who have brand j as their regular brand and brand x as their standby brand, x = 1, 2, ... , nj,. Nyj= the expected number of consumers that purchase the product during To who have brand y as their regular brand and brand j as their standby brand, y = 1, 2, ._, nj2 vx= the average consumption per capita of brand ] for consumers in the market that purchase the product during To with brand j as their regular brand and brand x as their standby brand, x = 1, 2, . .. , njl. Vyj= the average consumption per capita of brand y of consumers in the market that purchase the product during To with brand y as their regular brand and brand j as their standby brand, y = 1, 2, . .., n,2. the expected total consumption of brand k during To, k E Si. Vk qgh = the ratio of the expected consumption of brand g for consumers with preferred brand g and standby brand h to the expected consumption of brand g; g E Sj, h E S. V = the expected sales of the product during To. MSk = the market share during To of brand k, k E Si. m = the total number of brands in the market. The basic assumptions of the Competitive Pricing Model (CPM) are: Al: The number of units purchased by the consumers of a given brand has a stochastically stationary distribution4 over time in each period of time of duration To. A2: If a consumer switches from the regular brand] to another brand x because of a price increase, his or her consumption of brandj is gained completely by brand x. A3: That part of the consumption of each brand attributed to consumers that purchase it occasionally, and do not have it as their regular brand either before or after price increases, will not be affected by price changes. A4: For consumers having regular brand j and standby brand x, the consumption level of the regular brand is independent of the switching probability pr(jx).
4Ehrenberg [2], in a panel study concerning a number of nondurable consumer goods found that a negative binomial distribution fits the data of the units of the products purchased in a given interval of time. When the time was segmented into equal periods, such that piurchasesmade by a consumer in one period did not affect those made in the next period, Ehrenberg concluded that the units purchased in successive periods of time follow a Poisson distribution, while the means of these distributions across the members of the panel follow a x2 distribution. This results in a stationary negative binomial distribution for the units purchased by all the panel members in each period of time.

A COMPETITIVE

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MODEL

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After price increases, the expected sales loss by brand j to brand x E UJ), in accordance with (1) and the model's assumptions is given by Njx Vjx pr(jx). Also after the price increases, the expected sales gain by brandj from brand y in accordance with (2) and the assumptions is given by VyjNyj pr(yj)-

(4)
E(1U)2

(S)

From (4) and (5), the expected total gain in sales for brand j after price increases is given by
nj2

njI

y=l

pr(yj) - I VyjNyj

x=1

iNjx>xpr(jx)

(6)

but from (1) and (2) pr(jx) = pr(ACjx< Apj- Apx) = 'Pi P fX (A C) dACj)
(7)

pr(yj) = pr(ACyj < Apy - Apj) = APY ApIfy(A Cy)dACy.

Hence (6) will take the form
nj2 n'1

EV NjPYA-p fPJ(AzCyC)dACy-

f j/)AxfAPiJPxfjx(ACj)dzCj.

(8)

Ej, the expected percentage sales gain for brand j, is obtained by dividing (8) by Vj, the total sales of brandj during To before the price increases, and then multiplying it by 100. Since VyjNyj qyjVy V? qjxVj Vy/ VyjV y MSy

and

VjxNjx

the following form for Ej may be obtained: Ej

100EqyjMSS
2

APy AP1J(ACy)dACy

Y=1 j~~~~~~~~~~~~~~ 2 J5f -APx (A C ) dAC>] x x=1 qj 0J

fgh('ACg)

(9)

is zero for negative values of the argument. Expression (9) is the Competitive Pricing Model-the model central to this paper. This expression illustrates that the expected percentage gain or loss in sales of a brand in response to price increases is the result of a rather complex process in which some sales are "stolen" from other brands by the brand in question while some sales of the brand in question are "stolen" by others. Also, although the model deals in principle with price increases, it is applicable in situations where price increases and decreases both occur. In the case of a price decrease for brand i, Api, the amount of the decrease, should be substituted in (9) with a negative sign. The term corresponding to

1062

HANI I. MESAK AND RICHARD

C. CLELLAND

this brand should be so located in the formula that the upper limit of the integral is positive, and its lower limit is zero. The major assumptions may be summarized: (1) All consumers can afford to purchase any brand of the item. (2) Each consumer has a regular brand of the item. (3) Brands not acceptable according to Definition 1 are rejected. (4) Perceived values of brands are independent of price changes in these brands. (5) The number of items purchased in a given time period has a stochastically stationary distribution. (6) If a consumer switches from brandj to brand x because of a price increase, his consumption of brandj is gained completely by brand x. (7) That part of the consumption of each brand attributed to customers that purchase it occasionally, and do not have it as their regular brand either before or after price increase, will not be affected by price changes. (8) For consumers having regular brand j and standby brand x, the consumption level of the regular brand is independent of the switching probability pr(jx). The remaining sections discuss an illustrative empirical study aimed at investigating the model's accuracy. 5. Testing the Competitive Pricing Model These sections compare the expected percentage change in sales predicted by the Competitive Pricing Model for one product in five markets with an estimate of the percentage change in sales in those markets. Different vectors of price increase Ap occurred in each market. Three sources of data concerning a single low priced, frequently purchased consumer item were used. These are: (a) Chicago Tribune panel data from July 1, 1965 to June 30, 1968. (b) A large scale survey to determine differences in consumer perception between the main brand of the sponsoring company and its chief competitor. This questionnaire survey was run in seven cities during 1972. Interviewers personally contacted between 200 and 450 consumers in each of seven cities; those chosen were selected on a quota sample basis. The stability index of brand choice AC was measured from each questionnaire by a method equivalent to that of Pessemier et al. [13]. (c) Time series sales data showing monthly sales at the retail level of the main package of the brand of the item under study in five different markets from 1967 through 1971. Price increases at the retail level of brandj and its competitors occurred during this period. These five markets are entirely distinct from the seven cities used in (b). Validation of the Model (9) requires that its predictions be accurate and reliable when compared to real-world data independent of those used as inputs. Actually both sources a amd b were used to estimate the parameters of (9); b also provided a national distribution for AC. The model then was used to predict the percentage change in sales of brand]j in each of five entirely different markets. Since price increases actually occurred, it was not possible to determine what sales in the five markets would have been had there been no increases. It was necessary to estimate these quantities; a regression procedure was used, and actual sales losses were estimated by comparing the regression results with actual sales. 6. Estimation of the Model's Parameters

A square matrix of the quantities Ngh g, h = 1, . .. , n; g # h, representing the number of consumers who have brands g and h as their regular and standby brands respectively was obtained in each market.

A COMPETITIVE PRICING MODEL

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The first step is to estimate Let Xx = N Njwhere N is the total number of consumers whose regular brand isj. Assume that Vjx= Vj, that is, that average per q1,. capita consumption for consumers whose regular and standby brands are respectively j and x is the same as that for all consumers whose regular brand is j. Then qjx = xqj where qj = Nj Vj/ IVj is the ratio of the expected consumption of brand j from consumers for whom it is the regular brand to the total consumption of brandj. Previous studies have shown that qj is relatively stationary both in time and in space for this product. We estimated it from the Chicago Tribune data as follows. Consumption patterns for households with regular brandj were analyzed during six consecutive time periods of six months each. Consumers with regular brand j were identified. q; was calculated from
n
j=EJ i= I V(i) / V

where V(i) = consumption of brand j by individual i for whom j was the regular brand, and n the number of panel members whose regular brand was j. The values of qj for the six periods were respectively 0.6577, 0.7258, 0.7981, 0.8175, 0.8174 and 0.7215 yielding a mean of 0.7563 which was used as the estimate of qj. qjx was then estimated as this estimate multiplied by X,X. 7. Predictions from the Competitive Pricing Model

Stability indices ACj obtained from source b are shown in Table 1. This table considers only consumers who identified the brand of interest as their regular brand irrespective of their standby brands. Entries are the frequencies with which the several levels of lAC; were identified. Since [9] suggests such data are well fitted by the log-normal distribution, equality of means and variances of the seven distributions of ACj was tested after a natural logarithmic transformation. Hartley's Maximum F test [5] accepted the null hypothesis of variance equality at the 0.05 level. Then a standard analysis of variance accepted the hypothesis of equality of the means of the seven populations, again at the 0.05 level. The data were then combined to form one national distribution for AC>.
TABLE 1 ACj Distributionfor the Main Package of Brandj in Seven Different Cities ACj Interval 0<ACj<5 5<AC) < 10 10<ACj < 15 15<ACj<20 20<ACj < 30 30<ACj<40 40<ACj<50 50<ACj<75 75<AC <100 AC. > 100 TOTAL Mean of Transformed Data Variance of Transformed Data Market 1 1 8 5 6 4 1 6 1 0 0 32 2.982 0.426 Market 2 10 10 4 5 14 1 5 1 0 1 51 2.754 0.963 Market 3 6 12 4 9 12 3 3 1 0 1 51 2.837 0.735 Market 4 2 9 8 6 17 2 6 3 2 0 54 3.068 0.580 Market 5 3 5 5 3 7 0 0 0 0 0 23 2.692 0.324 Market 6 4 4 4 8 7 0 4 2 0 0 33 2.953 0.536 Market 7 0 4 2 1 4 1 2 0 0 0 14 2.991 0.329

1064

HANI I. MESAK AND RICHARD C. CLELLAND TABLE 2 Prices of Brandj over Time in Market A for the Standard Package of the Product \ \ Bran j xI x2 x3 x4 x5 x6 x7 February $1.25 $1.25 $1.25 $1.19 $1.10 $1.25 $1.25 $1.65 1970 February $1.30 $1.30 $1.30 $1.19 $1.15 $1.30 $1.30 $1.65 1971

~~~~Date

Month

Year

Month

Year

Amount of Price (Cents) S? 5?C 5? 0? 5? 5? 5? 0?

~~~~~~~~~~~~~~~~~~Incre

Next a detailed presentation is given of the computation of the expected percentage sales loss for brand j from the model in one of the five different markets, designated as market A, in which a vector of price increases had actually occured. Table 2 shows that here all brands except x3 and x7 raised price by 5? during the period of interest; thus it is anticipated that only brands x3 and x7 should steal sales from brandj. The expected percentage loss is given by
qjx33 Ej = 100[ fix3(ACj)

dACj +

qjx7

fjx7(ACj)

dACj

according to (9). Now since, out of a total of 258 consumers with brandj as regular brand, 89 and 19 had respectively brand x3 and brand x7 as their standby brands, we may estimate = Xjx3qj = (0.349)(0.7563) = 89/258 = 0.349 and X1x7 = 19/258 = 0.074. Hence Xyx3 %x3 and qjx7 = Xjx7qj = (0.074)(0.7563). Out of 89 consumers havingj and X3 as regular and standby brands respectively, 7 have AC1< 5?; out of 19 consumers havingj and x7 as regular and standby brands respectively, 2 have ACj < 5. Consequently, we estimate
5

fjx3(ACJ) r5

dACj

7/89 = 0.079, 2/19 = 0.015

Jofjx7(Cj ) dA thus obtaining

Ej = l00[ (0.349)(0.7563)(0.079) + (0.074)(0.7563)(0.015)] = 2.669%. Still in Market A, it is now necessary to fit a regression model to the data before price increases and make projections to forecast subsequent sales. The expected percentage loss or gain is estimated by comparing the actual sales subsequent to the price increase with the expected sales from the regression model. The model y = ABX is used where y is the sales per month of brand j in the period before price increases and x is the month number.5 The parameters A and B are estimated by ordinary least squares after adjusting the regression model to take a linear form. The percentage sales loss is estimated by Area B'/Area (A' + B') as in Figure 1. The period T is taken here to be from 5 to 8 months as data permits. The actual percentage sales loss of brandj was estimated to be 10.4%in this market.
5T brand in question was experiencing a constant growth rate during this period.

A COMPETITIVE PRICING MODEL

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Similar methods were employed, for the remaining four markets B, C, D and E in which more complex vectors of price increases occured, to obtain predictions from the Competitive Pricing Model and estimates for the actual sales losses incurred in these markets. Table 3 summarizes the results obtained for the five markets considered.

*jLU

<

PERIOD IN WHICHPRICE INCREASESTOOK PLACE

**

PROJECTED SALES FROM THE REGR_t.ESS~ION M~ODEL

SALES DATA BEFORE PRICE INCREASES

* \

~~

~ ~ ~

TIME IN MONTHS

FIGURE 1. Illustration of Estimating Sales Change In Response to Price Increases

TABLE 3 Estimated and Predicted Values- CompetitivePricing Model-Five Markets Market Estimate of Actual Percentage Sales Loss Using Regression y 10.4% 2.7% 4.1% 7.5% 9.5% Predicted Sales Loss from the Competitive Pricing Model u' 2.669% 0% 0.302% 2.449% 0% Deviation

d'=y-u' 7.731% 2.700% 3.798% 5.051% 9.500% 5.756% 197.244

A B C D E Mean of the Deviations Sum of Squares of the Deviations

A nonparametric sign test shows that the median of the differences between the values estimated by regression and those predicted by the model was significantly different from zero at the 0.05 level. Therefore, it may be concluded that the model probably underestimates the actual percentage sales losses in these markets. Although this is the case, it should be noted from Table 3 that the mean error in predicting percentage sales losses after price increases does not exceed 6%. 8. Comparisonwith an Alternative Model

The staff of the company producing brandj divided the brands of the product into two pricing classes, high-priced and low-priced. Brandj lies in the high priced class. The staff conducted a study relating the market share of brand j to the relative price difference between it and the leading brand in the low-priced class. For each area in which brand] is sold in the U.S., a cross-sectional econometric model relating

1066

HANI I. MESAK AND RICHARD C. CLELLAND

these two variables was constructed having the form: MS)- = a + bZ, where MS1-= market share of brandj for area i, Zi= relative price difference given by (Pji -pi)/Pii, Pji price of the standard package of the product of brand j for area i, Pli= price of the standard package of the product of the leading brand in the low-priced class for area i. The key assumption of this model is that the static relationship among markets at a point in time will hold for predicting a change over time for each market. After gathering data on the market share of brandj and its relative price difference in 82 areas, the analysis produced a statistically significant regression coefficient b = - 1.49. The company's model was used to predict the percentage loss or gain in sales of brand j in response to the vectors of price increases that occured in the markets A through E. As an illustration let, for, one of these five markets, Zi = relative price difference prior to price increases in the market, relative price difference after price increases in the market, Z2= MS1 = market share of brand j before price increases in the market, Thus, the predicted percentage loss or gain in sales of brand j after the price increases is given by
Il = lOOb(ZI -Z2)IMS19

Table 4 summarizes the results obtained when the cross-sectional model was used to predict the sales loss in these five markets. Even though the company's model produced a mean percentage deviation in sales nearer to zero than does the CPM, from Table 4 it appears that the latter performs better. Several of the predictions of the company's model have the wrong sign; none of the CPM's predictions has the wrong sign. The sum of squares of deviations given by the company's model (382.3) is very much larger than that of the Competitive Pricing Model (147.2).
TABLE 4 Estimated and Predicted Values- Company'sModel-Five Markets Market Estimate of Actual Percentage Sales Loss Using Regression y 10.4% 2.7% 4.1% 7.5% 9.5% Predicted Sales Loss from the Company's Model w' + 26.997% - 2.672% - 1.550% + 4.806% + 15.690%o Deviation

e'=y-w' - 16.597% + 5.372% + 5.650%o + 2.694% - 6.190% - 1.814% 382.267

A B C D E Mean of the Deviations Sum of Squares of the Deviations

9.

Discussion and Conclusions

This article shows that, a model, based on realistic if simplified behavioral assumptions at the individual level, can be constructed and used to predict the effect of price increases on sales at the aggregate level for low priced frequently purchased consumer

A COMPETITIVE

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items. A contrast with the Company's regression model is useful. That model is totally empirical. It is not based on a structural understanding of consumer behavior so it can only be improved by such devices as inclusion of new variables and transformations. The CPM, with all its assumptions, attempts to follow real human behavior. The merit of having an aggregate model that is grounded in individual behavior is that it allows the diagnosis of sources of error and rational modification in response. By carefully changing and increasing the complexity of the behavioral structure, one can hope to obtain better and better predictions of actual sales. It is believed that this approach is useful for the nondurable, frequently purchased, low cost items whose major brands are sold in numerous outlets. However, the model in its present state would not be applicable to a wider class of items. For example, a major home appliance would not be suitable for study. High demand volatility or frequent technological innovations would also invalidate this model as might a distribution system in which each retail outlet stocked only a few of the brands. It is possible that the model could be adapted to these cases, but such an adaptation is beyond the scope of the present paper. Some of the model's variations which have been studied involve the introduction of a budget constraint into the decision tree and the use of a second standby in the case where the regular and first standby brands become unacceptable after price increases. But these variations are not important in themselves. What we believe to be important is the demonstration that a new family of models is available for use by researchers in studying the effect of price increases on sales. By publishing these preliminary results at this time we hope to interest others in behavior based pricing models. The empirical work discussed in this paper is not conclusive. However, we think it useful to describe how one would go about the validation process; the tools for testing models of this type are available. From the point of view of marketing management, a number of practical applications arise. The Competitive Pricing Model can be used in decisions as to where, when, and by how much to raise (or reduce) prices. References
1. CURTIS, KERRY, "The Modeling of Consumer Purchase Behavior," Unpublished Ph.D. dissertation, University of Pennsylvania, 1969. 2. EHRENBERG, A. S. C., "The Pattern of Consumer Purchases," Appl. Statist., Vol. 8 pp. 26-41. 3. EMERY, FRED E., "Some Psychological Aspects of Prices," Document no. 664, Tavistock Institute of Human Relations, London, March 1962. 4. GABOR, ANDRE AND GRANGER, C. W. J., "Price as an Indicator of Quality, Report on Inquiry," Economica, Vol. 33 (1966), pp. 43-70. 5. HARTLEY, H. O., "The Maximum F-Ratio as a Short-Cut Test for Heterogeneity of Variance," Biometrika, Vol. 37 (1950), pp. 308-312. 6. JACOBY, JACOB, OLSON, JERRY, AND HADDOCK, RAFAEL, "Price, Brand Name, and Product Composition Characteristics as Determinants of Perceived Quality," J. Appl. Psychology, Vol. 55 (December 1971), pp. 470-479. 7. LAMBERT, ZARREL, "Price and Choice Behavior," J. Marketing Res., Vol. 9 (February 1972), pp. 35-40. , "Product Perception: An Important Variable in Price Strategy," J. Marketing, Vol. 34 8. (October 1970), pp. 68-71. 9. LANCASTER, KELVIN, "Consumer Demand: A New Approach," Columbia University Press, 1971. 10. MCCONNELL, J. DOUGLAS, "An Experimental Examination of the Price Quality Relationship," J. Business, Vol. 90 (1968), pp. 439-444. 11. MONROE, KENT. "The Influence of Price and the Cognitive Dimension on Brand Attitudes and Brand Preferences," Paper presented at Attitude Research and Consumer Behavior Workshop, 1970. 12. OXENFELT, ALFRED H., "A Decision-making Structure for Price Decisions," J. Marketing, Vol. 37 (January 1973), pp. 48-53. 13. PESSEMIER, EDGAR A., BURGER PHILIP C., AND TIGERT, DOUGLAS J., "Using Laboratory Brand Preference Scales to Predict Consumer Brand Purchases," Institute Paper No. 221, Graduate School of Industrial Administration, Purdue University, Lafayette, Indiana (October 1968).

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QUANDT,

HANI I. MESAK AND RICHARD

C. CLELLAND

RICHARD E. AND BAUMOL, WILLIAM J., "The Demand for Abstract Transportation Modes: Theory and Measurement," J. Regional Sci., Vol. 6, No. 2 (1966). 15. RAo, VITHALA, "The Salience of Price in the Perception and Evaluation of Product Quality: A Multidimensional Measurement Model and Experimental Test," Unpublished Ph.D. dissertation, University of Pennsylvania, 1970. 16. , "Salience of Price in the Perception and Evaluation of Product Quality: A Multidimensional Measurement Approach," Proceedings, Fall Conference, American Marketing Association, 1971, pp. 571-577. 17. SHAPIRO, BENSON. "Price as a Communicator of Quality: An Experiment," Unpublished Ph.D. dissertation, Harvard University, 1970.

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