Decomposing Promotion Effects with a Dynamic Structural Model of Flexible Consumption
Tat Y. Chan
Washington University in Saint Louis - John M. Olin Business School
University of Iowa - Department of Marketing
March 6, 2006
Journal of Marketing Research, Vol. 45, No. 4, pp. 487–498, August 2008
In this article, the authors offer a methodology to decompose the effects of price promotions into brand switching, stockpiling, and change in consumption by explicitly allowing for consumer heterogeneity in brand preferences and consumption needs. They develop a dynamic structural model of a household that decides when, what, and how much to buy, as well as how much to consume, to maximize its expected utility over an infinite horizon. By making certain simplifying assumptions, the authors reduce the dimensionality of the problem. They estimate the proposed model using household purchase data in the canned tuna and paper towels categories. The results from the model offer insights into the decomposition of promotional effects into its components. This could help managers make inferences about which brand’s sales are more responsive to stockpiling or increase in consumption expansion and how temporary price cuts affect future sales. Contrary to previous literature, the authors find that brand switching is not the dominant force for the increase in sales. They show that brand-loyal consumers respond to a price promotion mainly by stockpiling for future consumption, whereas brand switchers do not stockpile at all. The authors also find that heavy users stockpile more, whereas light users mainly increase consumption when there is a price promotion.
Number of Pages in PDF File: 53
Keywords: decomposition of promotional effects, dynamic structural model, flexible consumption, consumer heterogeneity
JEL Classification: M3, D1, C6
Date posted: June 6, 2006 ; Last revised: September 28, 2011
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