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Decomposing Promotion Effects with a Dynamic Structural Model of Flexible Consumption

Journal of Marketing Research, Vol. 45, No. 4, pp. 487–498, August 2008

53 Pages Posted: 6 Jun 2006 Last revised: 28 Sep 2011

Tat Y. Chan

Washington University in St. Louis - John M. Olin Business School

Chakravarthi Narasimhan

Washington University in St. Louis - John M. Olin Business School

Qin Zhang

University of Iowa - Department of Marketing

Date Written: March 6, 2006

Abstract

In this article, the authors offer a methodology to decompose the effects of price promotions into brand switching, stockpiling, and change in consumption by explicitly allowing for consumer heterogeneity in brand preferences and consumption needs. They develop a dynamic structural model of a household that decides when, what, and how much to buy, as well as how much to consume, to maximize its expected utility over an infinite horizon. By making certain simplifying assumptions, the authors reduce the dimensionality of the problem. They estimate the proposed model using household purchase data in the canned tuna and paper towels categories. The results from the model offer insights into the decomposition of promotional effects into its components. This could help managers make inferences about which brand’s sales are more responsive to stockpiling or increase in consumption expansion and how temporary price cuts affect future sales. Contrary to previous literature, the authors find that brand switching is not the dominant force for the increase in sales. They show that brand-loyal consumers respond to a price promotion mainly by stockpiling for future consumption, whereas brand switchers do not stockpile at all. The authors also find that heavy users stockpile more, whereas light users mainly increase consumption when there is a price promotion.

Keywords: decomposition of promotional effects, dynamic structural model, flexible consumption, consumer heterogeneity

JEL Classification: M3, D1, C6

Suggested Citation

Chan, Tat Y. and Narasimhan, Chakravarthi and Zhang, Qin, Decomposing Promotion Effects with a Dynamic Structural Model of Flexible Consumption (March 6, 2006). Journal of Marketing Research, Vol. 45, No. 4, pp. 487–498, August 2008. Available at SSRN: https://ssrn.com/abstract=906164

Tat Y. Chan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Chakravarthi Narasimhan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive, Campus Box 1133
Olin School of Business
St. Louis, MO 63130-4899
United States
314-935-6313 (Phone)
314-935-6359 (Fax)

Qin Zhang (Contact Author)

University of Iowa - Department of Marketing ( email )

United States

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