How Long Has it Been Since the Last Deal? Consumer Promotion Timing Expectations and Promotional Response

Posted: 3 Nov 2013

See all articles by Lucy Liu

Lucy Liu

Texas A&M University - Department of Marketing

Subramanian Balachander

University of California, Riverside - School of Business Administration

Date Written: October 15, 2013

Abstract

When modeling consumers’ forward-looking behavior using choice data on frequently purchased products, the common approach assumes that consumers have rational expectations about future promotions. Previous studies modeled such expectations using a first-order Markov (FOM) process. However, empirical evidence from several categories suggest that inter-promotion intervals can last several weeks implying that a FOM process that conditions future expectations of prices only on current-period prices can be limiting. We utilize a Proportional Hazard model (PHM) to characterize consumers’ rational expectation of future price promotion. We first show that estimating a dynamic structural model that uses a FOM specification for rational expectations can bias estimates of promotion effects with both simulation analysis and scanner panel data from four consumer packaged goods product categories. Secondly, we empirically show that a structural model employing a PHM specification for promotion expectations fits the data better than ones that assume only a FOM price or promotion expectation. Lastly, we show using an analysis of promotion policy changes that a structural model with a FOM expectation can lead to suboptimal managerial decisions.

Keywords: promotion, promotion expectations, dynamic discrete choice model, hazard model, stockpiling

JEL Classification: C23, C25, M31

Suggested Citation

Liu, Yan and Balachander, Subramanian, How Long Has it Been Since the Last Deal? Consumer Promotion Timing Expectations and Promotional Response (October 15, 2013). Quantitative Marketing and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2349073

Yan Liu (Contact Author)

Texas A&M University - Department of Marketing ( email )

430 Wehner
College Station, TX 77843-4218
United States

Subramanian Balachander

University of California, Riverside - School of Business Administration ( email )

United States

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