A Hierarchical Bayes Error Correction Model to Explain Dynamic Effects of Price Changes

44 Pages Posted: 21 Oct 2005

See all articles by D. Fok

D. Fok

Econometric Institute - Erasmus University Rotterdam; Erasmus Research Institute of Management (ERIM); Tinbergen Institute Rotterdam

Richard Paap

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

Csilla Horvath

Radboud University Nijmegen

Philip Hans Franses

Erasmus University Rotterdam (EUR) - Department of Econometrics

Date Written: August 2005 9,

Abstract

The authors put forward a sales response model to explain the differences in immediate and dynamic effects of promotional prices and regular prices on sales. The model consists of a vector autoregression rewritten in error-correction format which allows to disentangle the immediate effects from the dynamic effects. In a second level of the model, the immediate price elasticities, the cumulative promotional price elasticity and the long-run regular price elasticity are correlated with various brand-speciffic and category-speciffic characteristics. The model is applied to seven years of data on weekly sales of 100 different brands in 25 product categories. We find many significant moderating effects on the elasticity of price promotions. Brands in categories that are characterized by high price differentiation and that constitute a lower share of budget are less sensitive to price discounts. Deep price discounts turn out to increase the immediate price sensitivity of customers. We also find significant effects for the cumulative elasticity. The immediate effect of a regular price change is often close to zero. The long-run effect of such a decrease usually amounts to an increase in sales. This is especially true in categories characterized by a large price dispersion, frequent price promotions and hedonic, non-perishable products.

Keywords: sales, vector autoregression, marketing mix, promotional and regular price, short and long-term effects, hierarchical bayes

JEL Classification: M, C44, M31

Suggested Citation

Fok, Dennis and Paap, Richard and Horvath, Csilla and Franses, Philip Hans, A Hierarchical Bayes Error Correction Model to Explain Dynamic Effects of Price Changes (August 2005 9,). ERIM Report Series Reference No. ERS-2005-047-MKT. Available at SSRN: https://ssrn.com/abstract=828167

Dennis Fok (Contact Author)

Econometric Institute - Erasmus University Rotterdam ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1333 (Phone)
+31 10 408 9162 (Fax)

Tinbergen Institute Rotterdam ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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

Csilla Horvath

Radboud University Nijmegen ( email )

Postbus 9108
Nijmegen, 6500 HK
Netherlands

Philip Hans Franses

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)

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