A Price Expectations Model of Customer Brand Choice

The authors develop, calibrate, and test a disaggregate model of customer brand choice with customers’ price expectations as the mediating construct. They use a two-stage modeling procedure. The first stage is the determination of how expected prices are formed. In the second stage, brand choice is assumed to depend on the brand's retail price and whether or not that price compares favorably with the brand's expected price. The authors also test the hypothesis of symmetry in customer response to positive deviations (“losses”) and negative deviations (“gains”) of the retail price from the expected price. Analysis of scanner-panel data in the coffee market reveals that the brand choice model in which customers are assumed to respond to retail prices by comparing them with the corresponding expected prices provides a significantly better fit than a traditional brand choice model. Consistent with prospect theory, customers are found to react more strongly to price losses than to price gains. Results from the calibration of the expected price model indicate that expected price is not only dependent on past prices, but is also affected by the frequency with which a brand is promoted, economic conditions, customer characteristics, and the type of store shopped.