Promotional Timing for Substitutes and Complements at Major US Supermarkets

Richard Volpe

doi:10.5539/ibr.v6n1p31

Abstract

The purpose of this study is to investigate empirically the major determinants of the supermarket manager’s decision rule for placing products on promotions. Specifically, I examine the roles of substitutes and close complements as well as the potential interaction between national brands and private labels in determining promotional timing. The results expand upon the literature by demonstrating that complementary considerations, both within stores and among competitors, are highly significant determinants of promotional timing. Additionally, the results indicate that private labels are promoted heavily and that retailers incorporate the promotional timing of private labels when setting national brand promotions. This study provides further evidence that retail sales pricing typically does not conform to theoretical models of pricing.

Highlights

This study investigates empirically the determinants of the supermarket manager’s decision to place products on promotion, i.e., to offer temporary, advertised reductions in price. Varian (1980) proposed of model of promotional activity wherein retailers use promotions to randomize prices in order to discriminate between informed and uninformed consumers
It is evident that Safeway and Albertsons do not follow closely the recommendations prescribed by the literature for optimal promotional activity
For five of the eight hot dogs, two of the six buns, all four national brands (NBs) pastas, five of 12 pasta sauces, three of eight peanut butters, and nine of 12 jellies the results show that retailers are accounting for same-store complementary promotions, again as indicated by rejections of the null hypothesis of joint insignificance

Summary

Introduction

This study investigates empirically the determinants of the supermarket manager’s decision to place products on promotion, i.e., to offer temporary, advertised reductions in price. Varian (1980) proposed of model of promotional activity wherein retailers use promotions to randomize prices in order to discriminate between informed and uninformed consumers. Varian (1980) proposed of model of promotional activity wherein retailers use promotions to randomize prices in order to discriminate between informed and uninformed consumers. This study investigates empirically the determinants of the supermarket manager’s decision to place products on promotion, i.e., to offer temporary, advertised reductions in price. According to this model, prices would be uncorrelated over time. Pesendorfer (2002), found little empirical support for the Varian model. Focusing on a single popular category, ketchup, Pesendorfer showed that retailers take into account the time elapsed since the last promotion for other brands of ketchup, both in-store and at competing stores, when setting promotions

Objectives

Results

Conclusion