Modeling Potentially Time-Varying Effects of Promotions on Sales

32 Pages Posted: 26 Aug 2006

See all articles by Philip Hans Franses

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Philip A. Sijthoff

Erasmus University Rotterdam (EUR) - Department of Econometrics; Erasmus Research Institute of Management (ERIM)

Date Written: 30 2001 1,

Abstract

A commonly applied modeling tool for the analysis of promotional effects onweekly sales data is a linear regression model. Usually, such a model includes0/1 dummy variables for promotions, where weeks with a promotion get a valueof 1. When these variables are included in a model with parameters which areconstant over time, the market researcher implicitly makes two important but ratherrestrictive assumptions. The first is that anytime a dummy variable takes a value of1 and the relevant parameter is significant, there is a non-zero effect of promotionon sales. The second is that this effect is constant across all weeks.In many practical cases however, one may conjecture that the effects of promo-tion are not constant over time. Therefore, we propose a new and rather parsimo-nious econometric model for the purpose of measuring the effects of promotions,while allowing for time-variation in these effects. The main idea is that promotionscan (but not necessarily) lead to positive and suddenly large values of sales in thesame week, and that they can perhaps lead to large negative values in the week there-after, if there is a, what is called, post-promotion dip. We discuss representation and interpretation of the model, and we outline the maximum likelihood parameterestimation method. Simulation results suggest that the estimation method is quitereliable and that the distribution of the estimator is approximately normal. Weillustrate the model in substantial detail on two sets of empirical data in order toindicate its practical usefulness

Keywords: ales, promotions, time-varying effects, censored regression

JEL Classification: M, M31, C44, M39

Suggested Citation

Franses, Philip Hans and Paap, Richard and Sijthoff, Philip A., Modeling Potentially Time-Varying Effects of Promotions on Sales (30 2001 1,). ERIM Report Series Reference No. ERS-2001-05-MKT. Available at SSRN: https://ssrn.com/abstract=370864

Philip Hans Franses (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1278 (Phone)
+31 10 408 9162 (Fax)

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Philip A. Sijthoff

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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