Consumer Stockpiling and Competitive Promotional Strategies

Posted: 28 Feb 2014

See all articles by Manish Gangwar

Manish Gangwar

Indian School of Business (ISB), Hyderabad

Nanda S. Kumar

University of Texas at Dallas - Department of Marketing

Ram C. Rao

The University of Texas at Dallas, Naveen Jindal School of Management

Date Written: 2014

Abstract

An examination of brand prices in several categories reveals that the distribution of prices is multimodal, with firms offering shallow and deep discounts. Another interesting feature of these distributions is that they may have holes in the interior of the support. These pricing distributions do not occur in extant theoretical models of price promotions. We develop a dynamic model of competition in which some price-sensitive consumers stockpile during periods of deep discounts. A game-theoretic analysis of our model generates a multimodal pricing distribution with a hole in the interior of the support. Consumer stockpiling in our model also gives rise to negative serial correlation in prices. This is consistent with our empirical observation of the pricing distribution of several brands across multiple categories in the IRI marketing data set.

We generate several interesting insights into firms' optimal promotional strategies and their interplay with the clientele mix, market structure, and other market factors. We find that, in equilibrium, stockpiling by price-sensitive consumers neither harms nor benefits firms when they adopt equilibrium strategies. Interestingly, when price-sensitive consumers stockpile, even increased consumption as a result of stockpiling does not lead to higher profits for firms.

Keywords: promotional strategies, consumer stockpiling, endogenous stockpiling threshold, interior modes, multiple modes, hole in distribution, negative serial correlation

Suggested Citation

Gangwar, Manish and Kumar, Nanda S. and Rao, Ram C., Consumer Stockpiling and Competitive Promotional Strategies (2014). Marketing Science, Vol. 33, No. 1, 2014; pp. 94-113; DOI: 10.1287/mksc.2013.0814. Available at SSRN: https://ssrn.com/abstract=2397607

Manish Gangwar (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 111
India

HOME PAGE: http://www.isb.edu/faculty/Manish_Gangwar/index.html

Nanda S. Kumar

University of Texas at Dallas - Department of Marketing ( email )

Dallas, TX
United States
972-883 6426 (Phone)
972-883 2799/972-883 6727 (Fax)

HOME PAGE: http://www.utdallas.edu/~nkumar

Ram C. Rao

The University of Texas at Dallas, Naveen Jindal School of Management ( email )

Dallas, TX
United States
972-883-2580 (Phone)
972-883-6727 (Fax)

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