Economic Shocks, the Dispersion of Consumer Preferences and the Assessment of Price and Product Strategies

• Applicant: Professor Dr. Daniel Klapper
• Subject Area: Accounting and Finance
• Term: from 2013 to 2017
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 234486640

In this project, we investigate the consequences of economic shocks, such as legislative initiatives, on the dispersion of consumer preferences, possible changes in consumer preferences and the subsequent effects on the pricing and brand strategies of firms in markets of consumer goods and durable goods. This research focuses on modeling heterogeneity in revealed consumer preferences, using aggregate or disaggregate sales information. In a second step, we study the implications of economic shocks on consumer welfare and implications on the profitability of firms and their competitors via the supply side of the market. The economic consequences of changes in the dispersion of consumer valuations in response to economic shocks for firms' marketing strategies and tactics, e.g. pricing and product supply, require more attention of research. An example of our subject of study is a car manufacturer who changes its product offerings in response to changes in governmental regularizations, i.e., by offering cars with less powered engines or less fuel consumption. In general consumers will not unanimously like manufacturer's actions which may affect consumer preferences in such a way that the demand curve will not only move inwards or outwards but that it will rotate because the distribution of the willingness of heterogeneous consumers to pay for a particular product will change. Another example is related to the existence of price points, which means that prices near a certain threshold are more commonly observable. Consumers may perceive changes below the price point as less obstructive than at or above the price point which may result in non-linear effects of product prices. Therefore, the comprehension of individual preferences for changes of prices near the price points is decisive for explaining the overall demand for a product under new price politics or strong cost shocks, e.g. as a response to sharp increases in raw material costs.An important feature of this research project is that we apply structural models for demand and supply of a market and we account for heterogeneity in consumer preferences when modeling aggregate or disaggregate demand in nondurable or durable goods markets.We expect that our results will improve our understanding of the links between changes in the consumer preferences and the behavior of firms in response to these preferences. These insights will enhance our understanding of how firms should react to exogenously induced transformations (e.g., a macro-economic shock) and how government and legislative initiatives should consider these reactions. Thus, the results of this research will be relevant for regulators and managers.

• DFG Programme: Research Grants