Consumer price sensitivity in the retail industry: Latitude of acceptance with heterogeneous demand

Estimating the effect of price changes on demand is an essential task for retailers. This study proposes a methodology based on consumer utility for modeling the price thresholds phenomenon that allows for threshold asymmetry, incorporates consumer heterogeneity and uses weekly aggregated brand-level data. Unlike other studies based on consumer utility models, which generate results only for the price elasticity of market share, a methodology for estimating price elasticity of demand is also included. Data on fast-moving goods (detergents, toilet paper, soft drinks, meats, liquid juices and yogurts) supplied by a major retail chain are used to demonstrate the existence of price thresholds and their effects on price elasticity. In every case it was found that within the thresholds or latitude of acceptance, consumers are relatively less sensitive to price variations while beyond them a higher sensitivity was observed. In some cases a product brand was classified as inelastic within the latitude of acceptance and elastic outside of it.

► We modeled price thresholds and demand price elasticity changes on eight fast moving goods categories. ► The model takes into account consumer heterogeneity using aggregate data for brands. ► Demand price elasticity does not remain constant for all levels of price variations. ► Within the latitude of acceptance, the markets are relatively inelastic to price changes, as opposed to price changes outside of the latitude of acceptance. ► Price thresholds can be asymmetric.