Download this Paper Open PDF in Browser

A Price Discrimination Model of Trade Promotions

Marketing Science, Vol. 27, No. 5, pp. 779-795, 2007

38 Pages Posted: 16 Jun 2009  

Tony Haitao Cui

University of Minnesota - Twin Cities

Jagmohan S. Raju

University of Pennsylvania - Marketing Department

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing

Date Written: 2007

Abstract

Critics have long faulted the wide-spread practice of trade promotions as wasteful. It has been estimated that this practice adds up to $100 billion worth of inventory to the distribution system. Yet the practice continues. In this paper, we propose a price-discrimination model of trade promotions. We show that in a distribution channel characterized by a dominant retailer, a manufacturer has incentives to price-discriminate between the dominant retailer and smaller independents. While offering all retailers the same pricing policy, price-discrimination can be implemented through trade promotions as trade promotions induce different inventory-ordering behaviors on the part of retailers. Differences in inventory holding costs have been shown to be an important determinant of consumer promotions. Our analysis suggests that differences in holding costs are also potentially an important driver for the use of trade promotions. The implications from our model explain a number of anecdotal and/or empirically observed puzzles about how trade promotions are practiced. For example, our analysis explains why chain stores welcome trade promotions but independents do not. Our analysis outlines implications for managing trade promotions.

Keywords: channels of distribution, channel power, trade promotion, forward-buying

JEL Classification: D24, D42, L11, L12, L23, L43, M11, M31

Suggested Citation

Cui, Tony Haitao and Raju, Jagmohan S. and Zhang, Z. John, A Price Discrimination Model of Trade Promotions (2007). Marketing Science, Vol. 27, No. 5, pp. 779-795, 2007. Available at SSRN: https://ssrn.com/abstract=1419704

Tony Haitao Cui (Contact Author)

University of Minnesota - Twin Cities ( email )

321 19th Ave S
Suite 3-150
Minneapolis, MN 55455
United States

Jagmohan S. Raju

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States
215-898-1114 (Phone)
215-898-2534 (Fax)

Z. John Zhang

University of Pennsylvania - The Wharton School - Department of Marketing ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Paper statistics

Downloads
130
Rank
184,975
Abstract Views
1,063