Dynamic Effects of Price Promotions: Field Evidence, Consumer Search, and Supply-Side Implications

78 Pages Posted: 12 Jun 2017 Last revised: 23 Jul 2018

See all articles by Andres Elberg

Andres Elberg

Pontificia Universidad Católica de Chile - School of Management

Pedro Gardete

Stanford Graduate School of Business

Rosario Macera

Universidad de los Andes, Chile

Carlos Noton

Dept of Industrial Engineering - University of Chile

Date Written: July 2

Abstract

This paper investigates the dynamic effects of price promotions in a retail setting through the use of a large-scale field experiment which involved varying the promotion depths of 170 products across 17 categories in 10 supermarkets of a major retailer in Chile. In the intervention phase of the experiment, customers were exposed to a promotion schedule that differed only on promotional depths: treated customers were exposed to deep discounts (approximately 30%), whereas control customers were exposed to shallow discounts (approximately 10%). In the subsequent measurement phase, the promotion schedule held discount levels constant across groups. We find that treated customers were 22.4% more likely to buy promoted items than their control counterparts, despite facing the same promotional deals. Strikingly, the magnitude of the dynamic effects of price promotions (when promotional depths are equal across conditions) is 61% of the promotional effects induced by offering shallow vs. deep discounts during the intervention phase. The result is robust to other concurrent dynamic forces, including consumer stockpiling behavior and state dependence. We use the experimental variation and historical promotional activities to inform a demand-side model in which consumers search for deals, and a supply-side model in which firms compete for those consumers. We find that small manufacturers can benefit from heightened promotion sensitivity by using promotions to induce future consideration. However, when unit margins are high, heightened promotion sensitivity leads to fierce competition, making all firms worse off.

Suggested Citation

Elberg, Andres and Gardete, Pedro and Macera, Rosario and Noton, Carlos, Dynamic Effects of Price Promotions: Field Evidence, Consumer Search, and Supply-Side Implications (July 2). Stanford University Graduate School of Business Research Paper No. 3401. Available at SSRN: https://ssrn.com/abstract=2983193 or http://dx.doi.org/10.2139/ssrn.2983193

Andres Elberg

Pontificia Universidad Católica de Chile - School of Management ( email )

Av. Vicuña Mackenna 4860
Santiago, RM 7820436
Chile

Pedro Gardete (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Rosario Macera

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

Carlos Noton

Dept of Industrial Engineering - University of Chile ( email )

Beauchef 851
Santiago, RM
Chile

HOME PAGE: http://www.dii.uchile.cl/~cnoton/

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