The Impact of Product Substitution and Retail Capacity on the Timing and Depth of Price Promotions: Theory and Evidence

39 Pages Posted: 25 Nov 2011

See all articles by M. Gumus

M. Gumus

McGill University - Desautels Faculty of Management

Philip Kaminsky

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Sameer Mathur

McGill University - Desautels Faculty of Management

Date Written: November 24, 2011

Abstract

We investigate the impact of store capacity and extent of inter-product substitution in a retailer’s assortment on the optimal timing and depth of price promotions using a two step approach. First, a survey of price promotions within the shampoo and detergent assortments of four mass-market retailers yields three motivating observations: (i) Stores that devote more capacity to stock a product category offer deeper discounts compared to stores that devote comparatively less aisle space to a category; (ii) stores offer deeper (shallower) discounts on expensive products, compared to inexpensive products within a category, if the extent of inter-product substitution in their assortment is low (high); and (iii) stores sequentially (simultaneously) promote products within the same category, if the extent of inter-product substitution in their assortment is low (high). Next, to generate insights into this retailer behaviour, we develop a normative model of a monopolistic retailer selling two substitutable products over a finite number of time-periods in a market where consumers are heterogeneous in terms of brand preference and loyalty, as well as in term of time sensitivity. In our analysis of the model, we present closed-form solutions to limiting cases of the model, and use these solutions to develop insight into our empirical observations.

Keywords: Promotions, Pricing, Retailing

JEL Classification: M30, M31, L81

Suggested Citation

Gumus, Mehmet and Kaminsky, Philip and Mathur, Sameer, The Impact of Product Substitution and Retail Capacity on the Timing and Depth of Price Promotions: Theory and Evidence (November 24, 2011). Available at SSRN: https://ssrn.com/abstract=1964325 or http://dx.doi.org/10.2139/ssrn.1964325

Mehmet Gumus

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Philip Kaminsky

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR) ( email )

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

Sameer Mathur (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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