A Framework to Determine the Value of Consumer Consideration Set Information for Firm Pricing Strategies

Managers allocating budgets using scarce economic resources increasingly invest in consumer information to set prices. This highlights the importance of developing methods to efficiently use consumer information in firm pricing strategies so as to increase profits. In this article we utilize such a method which includes information about consumer consideration sets. Extant pricing strategies assume that all brands in the market are included in this competitive set while setting prices. Through an empirical illustration in the ketchup market we demonstrate that firms can improve profits substantially by including consumer consideration sets in arriving at their optimal pricing strategies. We find that the ability of a brand to increase prices seems to depend on both the number of competitors it faces as well as the proportion of households for whom there are competitors in their consideration sets. Failure to incorporate consideration sets leads to biased equilibrium margin inferences and a substantial reduction in net profits.