Consumer and Retailer Promotions: Who is Better Off?

Abstract

The long-term effects of promotions on sales are increasingly linked to the supposed shift of economic power within channels from manufacturers to retailers. However, formal knowledge about how they influence channel decisions under different promotional arrangements and the distribution of channel profits remains very sparse. In this paper, I develop two 2-period models to investigate the impact on channel decisions and profits of manufacturer-controlled and retailer-controlled promotions targeted at consumers. My findings indicate that retailers always invest in retailer promotions, while manufacturers may find it optimal to not invest in consumer promotions. Economic power shifts from manufacturers to retailers when consumer promotions significantly expand the baseline demand in the long-term. Otherwise, manufacturers remain more powerful. Trade promotions or other profit-transfer mechanisms may be indispensable in easing conflicts over who should undertake promotions, especially when these promotions substantially increase future sales.