The Indirect Impact of Price Deals on Households - Purchase Decisions Through the Formation of Expected Future Prices

Journal of Retailing, 88(1), March 2012, 88-101

41 Pages Posted: 30 Sep 2011 Last revised: 2 Nov 2012

Qin Zhang

University of Iowa - Department of Marketing

Seethu Seetharaman

Washington University in St. Louis - John M. Olin Business School

Chakravarthi Narasimhan

Washington University in St. Louis - John M. Olin Business School

Date Written: August 18, 2011

Abstract

We examine the indirect impact of price deals, which occurs through the formation of expected future prices, on households’ purchase decisions. Two competing learning processes of households’ formation of expected future deals that lead to opposite predictions are proposed. Under a deal-probability learning process, a current deal on a brand raises households’ expectations of a deal on the same brand in the immediate future, while under a deal-timing learning process, a current deal on a brand lowers households’ expectations of a deal on the same brand. We embed each learning specification within a comprehensive econometric framework that simultaneously examines three purchase decisions – incidence, brand choice and quantity – at the household level, while explicitly correcting for two sources of selectivity bias in discrete quantity outcomes. We estimate the proposed model using scanner panel data on paper towels, and find that (1) the deal-probability learning process better describes how households incorporate the deal information into the formation of future price expectations compared to the deal-timing learning process; (2) the indirect impact of price deals is greater for brand-loyals than for brand-switchers; and (3) the indirect impact of price deals is greater for larger families, heavy users, less educated and less employed households, and infrequent shoppers. We also show that ignoring the indirect impact of price deals severely overstates the sales effects.

Keywords: Consumer Learning, Price Deals, Direct and Indirect Deal Effects, Discrete Quantity Model, Self-Selectivity Correction

JEL Classification: C23, C24, C51, D12, D83, M31

Suggested Citation

Zhang, Qin and Seetharaman, Seethu and Narasimhan, Chakravarthi, The Indirect Impact of Price Deals on Households - Purchase Decisions Through the Formation of Expected Future Prices (August 18, 2011). Journal of Retailing, 88(1), March 2012, 88-101. Available at SSRN: https://ssrn.com/abstract=1935011

Qin Zhang (Contact Author)

University of Iowa - Department of Marketing ( email )

United States

Seethu Seetharaman

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Chakravarthi Narasimhan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive, Campus Box 1133
Olin School of Business
St. Louis, MO 63130-4899
United States
314-935-6313 (Phone)
314-935-6359 (Fax)

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