Consumer Stockpiling and Competitive Promotional Strategies

Abstract

An examination of brand prices in several categories reveals that the distribution of prices is multimodal, with firms offering shallow and deep discounts. Another interesting feature of these distributions is that they may have holes in the interior of the support. These pricing distributions do not occur in extant theoretical models of price promotions. We develop a dynamic model of competition in which some price-sensitive consumers stockpile during periods of deep discounts. A game-theoretic analysis of our model generates a multimodal pricing distribution with a hole in the interior of the support. Consumer stockpiling in our model also gives rise to negative serial correlation in prices. This is consistent with our empirical observation of the pricing distribution of several brands across multiple categories in the IRI marketing data set. We generate several interesting insights into firms' optimal promotional strategies and their interplay with the clientele mix, market structure, and other market factors. We find that, in equilibrium, stockpiling by price-sensitive consumers neither harms nor benefits firms when they adopt equilibrium strategies. Interestingly, when price-sensitive consumers stockpile, even increased consumption as a result of stockpiling does not lead to higher profits for firms.