Price Promotions in Choice Models

58 Pages Posted: 13 Jun 2013

See all articles by John R. Howell

John R. Howell

Brigham Young University - Marriott School of Business

Sanghak Lee

Arizona State University; University of Iowa - Department of Marketing

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics

Date Written: May 28, 2013

Abstract

Promotions are commonly used in marketing to increase sales and drive profits by temporarily decreasing the price per unit of a good. Some price promotions apply to all quantities (20% off), some have limits on the number of units that can be purchased at a reduced price, and others only offer the discount if the volume purchased is sufficiently high. We develop a model of price promotions in the context of a direct utility model where its effects are incorporated through the budget constraint. Price promotions complicate the estimation and analysis of direct utility models because they induce kinks and points of discontinuity in the budget set. We propose a Bayesian approach to dealing with these irregularities, and demonstrate the ability of direct utility models to engage in counter-factual analyses of price promotions given a consumer’s utility function. We investigate the stability of utility function estimates for consumers under alternative price promotions, and find evidence supporting the assumption that price promotions only affect consumer choices through the budget constraint. We then explore the benefits of customization and show that firm profits can significantly increase by offering different types of promotions to different people.

Keywords: Utility theory, Bayesian estimation, nonlinear pricing, irregular budget sets

Suggested Citation

Howell, John R. and Lee, Sanghak and Allenby, Greg M., Price Promotions in Choice Models (May 28, 2013). Available at SSRN: https://ssrn.com/abstract=2271245 or http://dx.doi.org/10.2139/ssrn.2271245

John R. Howell (Contact Author)

Brigham Young University - Marriott School of Business ( email )

Provo, UT 84602
United States

Sanghak Lee

Arizona State University ( email )

Tempe, AZ 85287-4106
United States
480-965-5433 (Phone)

University of Iowa - Department of Marketing ( email )

United States

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics ( email )

Fisher Hall 524
2100 Neil Ave
Columbus, OH 43210
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
262
Abstract Views
1,216
rank
147,544
PlumX Metrics