Pricing and Product Positioning with Relative Consumer Preferences*

Abstract

Frequent price promotions force consumers to continuously reassess their preferences over product offerings. When this leads consumers to exhibit a bias of “relative thinking”, such as may be triggered by a focus only on the most salient product attribute, we show in a model of sales (Varian, H. R., 1980, American Economic Review, 70(4), pp. 651–659) that this profoundly alters firms' pricing and product-positioning strategies. Vertical differentiation becomes more likely, with firms preferring to occupy the low-quality space in particular when they have few loyal consumers. More generally, product positioning now depends on the composition of consumers' consideration sets.