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A Study of price elasticity dynamics using parsimonious replacement/multiple purchase diffusion models

Author: Parker, Philip M. INSEAD Area: Marketing Series: Working Paper ; 91/47/MKT Publisher: Fontainebleau : INSEAD, 1991.Language: EnglishDescription: 17 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: The importance of category-level product life cycles (PLC) in formulating marketing mix strategies has received great attention in the literature. While there is widespread recognition that elasticities play a critical role in formulating pricing strategies, little empirical research has been conducted to determine if such elasticities vary over the PLC. This research investigates price elasticity dynamics over the category sales life cycle. The prevailing hypothesis that elasticities decrease in absolute value over the life cycle is tested via parsimonious product category diffusion models which incorporate first purchases and replacement/multiple purchases. These models are used to control for the underlying diffusion process, and are modified to incorporate price. Alternatively, elasticity specifications are estimated using data from 13 consumer durables categories. Comparative statistical tests generate a basis upon which the general hypothesis can be tested and, ultimately, supported empirically
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The importance of category-level product life cycles (PLC) in formulating marketing mix strategies has received great attention in the literature. While there is widespread recognition that elasticities play a critical role in formulating pricing strategies, little empirical research has been conducted to determine if such elasticities vary over the PLC. This research investigates price elasticity dynamics over the category sales life cycle. The prevailing hypothesis that elasticities decrease in absolute value over the life cycle is tested via parsimonious product category diffusion models which incorporate first purchases and replacement/multiple purchases. These models are used to control for the underlying diffusion process, and are modified to incorporate price. Alternatively, elasticity specifications are estimated using data from 13 consumer durables categories. Comparative statistical tests generate a basis upon which the general hypothesis can be tested and, ultimately, supported empirically

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