Estimating strategic price response using cointegration analysis: the case of the domestic black and herbal tea industries
2002
Vickner, S.S. | Davies, S.P.
In this article we develop a vector error correction model using weekly, point-of-purchase scanner data to investigate multivariate pricing relationships among brands competing in the domestic black and herbal tea industries. Johansen's likelihood ratio test established the prices of Bigelow black tea and Celestial Seasonings herbal tea were cointegrated; hence, the pricing decisions of the largest firms in each respective tea market were not unrelated. The black tea prices of Bigelow and Twining, the two largest firms in the black tea market, were cointegrated as well. The cointegrating vectors, speeds of adjustment, and impulse response function analysis provide unique insights into the direction, magnitude, and speed of price response in these value-added, agricultural product markets.
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