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Journal of the Academy of Marketing Science
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The Dynamics of Price Elasticity of Demand in the Presence of Reference Price Effects

Gadi Fibich

Tel Aviv University, fibich{at}math.tau.ac.il

Arieh Gavious

Ben Gurion University, ariehg{at}bgumail.bgu.ac.il

Oded Lowengart

Ben Gurion University, odedl{at}bgumail.bgu.ac.il

The authors derive an expression for the price elasticity of demand in the presence of reference price effects that includes a component resulting from the presence of gains and losses in consumer evaluations. The effect of reference price is most noticeable immediately after a price change, before consumers have had time to adjust their reference price. As a result, immediate-term price elasticity is higher than long-term elasticity, which describes the response of demand long after a price change, when reference price effects are negligible. Furthermore, because of the differential effect of gains and losses, immediate-term price elasticity for price increases and price decreases is not equal. The authors provide a quantitative definition for the terms immediate term and long term, using the average interpurchase time and the discrete "memory" parameter. Practical consequences of the distinction between immediate- and long-term elasticities for the estimation and use of elasticity values are discussed.

Key Words: Reference price • price elasticity • immediate term • promotional elasticity

Journal of the Academy of Marketing Science, Vol. 33, No. 1, 66-78 (2005)
DOI: 10.1177/0092070304267108
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