The Retailer Needs to Be Paid for Sophisticated Decisions: Modelling Promotional Interactions between Consumers, Retailers and Brand Managers

Abstract

Competition among brands that sell through a supermarket chain is a repeated moderated oligopoly, where the retailer moderates brand competition by choosing the store promotions that consumers see each week. The interactions between consumers, retailers and brand managers are complex, with each having different goals and constraints. Here we use regression and Genetic Algorithm techniques to model these interactions. Our goal is to address an important question in the literature; specifically whether the retailer gains positive returns through more sophisticated moderation. In doing so, we draw on work in economics showing that unsophisticated or Zero-Intelligence (ZI) agents can often replicate real-world outcomes. Hence we posit and test three levels of retailer sophistication - ZI, naive and sophisticated - bringing a novel perspective to this important topic.

We find that, although the behavior of brand managers is more realistic with the sophisticated retailer, on average the category volumes are lower than with either of the naive or ZI retailer. The dominant brand, however, does benefit with the sophisticated retailer, by preserving its profits and reducing those of its competitors. We speculate that the retailer either receives adequate side-payments from the dominant brand or there are sufficient spin-off benefits in other categories to compensate the retailer for the loss of volume in the focal category.

Keywords: Store Promotions, Retailer Behavior, Genetic Algorithm, Zero-intelligence Agents