Data Driven Decision Making

Part III · Chapter 8

Pricing and Managerial Levers

Turning an identified elasticity into a defensible price, then into a memo a committee can act on.

This chapter turns the causal machinery of Part III into an actual number on a shelf tag. Working the Progresso scanner-data case, it estimates own-price elasticity in log-log space, watches the coefficient walk from a confounded −3.21 to a within-store −2.23 as fixed effects are added, then extends to a regional cross-price matrix that exposes where Campbell's and private label steal volume. The payoff is the Lerner inverse-elasticity rule, which converts a single coefficient into an optimal markup and shows in dollars why feeding a naive elasticity into the formula returns the wrong price. A closing studio reconciles elasticity, heterogeneity, and synthetic control into a one-page strategic pricing memo a committee can act on.

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Topics covered

own-price elasticitylog-log constant-elasticity demandelastic vs. inelastic zonesstore fixed-effects regression laddercross-price elasticity matrixsubstitutes vs. complementsasymmetric substitutionthe Lerner inverse-elasticity ruleoptimal markup over marginal cost

In this chapter

  1. 8.1Price ElasticityDefines own-price elasticity, motivates the log-log specification, and walks the Progresso estimate from a confounded −3.21 to a within-store −2.23.
  2. 8.2Cross-Price Elasticity and SubstitutionReads the sign of cross-price coefficients to separate substitutes from complements, using a regional Progresso-vs-Campbell's matrix that varies by market.
  3. 8.3From Elasticity to Pricing DecisionsDerives the Lerner inverse-elasticity rule and prices out, in dollars, the cost of optimizing on a naive versus an identified elasticity.
  4. 8.4Pricing and Promotion Strategy StudioCapstone studio reconciling elasticity, heterogeneity, and synthetic control into a five-section strategic pricing and promotion memo.

Interactive studios

CPG & PricingCountercyclical Pricing: Progresso SoupWhen demand is seasonal and a recession hits, when should a soup brand cut price and when should it hold? Trace promotion, volume, and competitive response across the cycle.