This article evaluates the variations in response to price change. A `random utility theory stated preference model' is used to estimate the joint impact on the price sensitivity of differences in systematic utility of different products, and differences in the consistency with which a consumer responds to price. Recent researches indicate that, as the systematic utility of a product increases and/or its price decreases (all else being equal), the price sensitivity also decreases. Researches show that there is a systematic effect of income on price sensitivity, as high income consumers are less price sensitive than the low income consumers.

The demand for any product is determined by many variables. However, among these variables, price is the most important one that affects the nature of demand of a particular product or service. Sometimes this may be the price of a particular product, price of other products, consumer's taste and preferences. Change in such price automatically affects the demand of the product in the marketplace. Intuitively, the price sensitivity of a consumer can be described as a change in his purchase behavior in response to a change in price. More formally, price sensitivity can be defined as the percentage change in a consumer's probability of choosing a product or service that is relative to the percentage change in price. According to this definition, price sensitivity equals the direct (point) elasticity of the choice probability of a product or service with respect to price.

The first implication of the proposed definition for price sensitivity is that there exists a relationship between product utility and price sensitivity. A change in the probability of selecting product P (j) affects the price elasticity of the product E. If such a change is generated by a shift in the systematic utility of the product, V_j, the shift in elasticity is positively related to the shift in the choice probability. In other words, consumers are less price sensitive (elasticity less negative) for more attractive products or services. Likewise, changes in the price of a product also affect price sensitivity. This second effect is somewhat more complex, because price changes affect elasticity directly (a positive change in p_j) as well as indirectly (a negative change in the probability P(j)).

Management Research Journal, Price Sensitivity, Value Pricing Strategy, Economic Models, Customer Satisfaction, Marketing Literature, Electronic Commerce, Advertising Literature, Value-based Pricing, Data Mining Software, Information Technology, Insurance Companies, Decision-making Process.