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Modeling Potentially Time-Varying Effects of Promotions on Sales

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Author Info

  • Franses, Ph.H.B.F.
  • Paap, R.
  • Sijthoff, Ph.A.

Abstract

A commonly applied modeling tool for the analysis of promotional effects onweekly sales data is a linear regression model. Usually, such a model includes0/1 dummy variables for promotions, where weeks with a promotion get a valueof 1. When these variables are included in a model with parameters which areconstant over time, the market researcher implicitly makes two important but ratherrestrictive assumptions. The first is that anytime a dummy variable takes a value of1 and the relevant parameter is significant, there is a non-zero effect of promotionon sales. The second is that this effect is constant across all weeks.In many practical cases however, one may conjecture that the effects of promo-tion are not constant over time. Therefore, we propose a new and rather parsimo-nious econometric model for the purpose of measuring the effects of promotions,while allowing for time-variation in these effects. The main idea is that promotionscan (but not necessarily) lead to positive and suddenly large values of sales in thesame week, and that they can perhaps lead to large negative values in the week there-after, if there is a, what is called, post-promotion dip. We discuss representation and interpretation of the model, and we outline the maximum likelihood parameterestimation method. Simulation results suggest that the estimation method is quitereliable and that the distribution of the estimator is approximately normal. Weillustrate the model in substantial detail on two sets of empirical data in order toindicate its practical usefulness

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File URL: http://hdl.handle.net/1765/70
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Bibliographic Info

Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2001-05-MKT.

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Date of creation: 30 Jan 2001
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Handle: RePEc:dgr:eureri:200164

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Web page: http://www.erim.eur.nl/

Related research

Keywords: ales; censored regression; promotions; time-varying effects;

This paper has been announced in the following NEP Reports:

References

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  1. Robert C. Blattberg & Richard Briesch & Edward J. Fox, 1995. "How Promotions Work," Marketing Science, INFORMS, vol. 14(3_supplem), pages G122-G132.
  2. Paap, R. & Franses, Ph.H.B.F., 1999. "Do the US and Canada have a common nonlinear cycle in unemployment?," Econometric Institute Report EI 9907-/A, Erasmus University Rotterdam, Econometric Institute.
  3. Foekens, Eijte W. & S.H. Leeflang, Peter & Wittink, Dick R., 1998. "Varying parameter models to accommodate dynamic promotion effects," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 249-268, November.
  4. Dekimpe, M.G. & Hanssens, D., 1995. "The persistence of marketing effects on sales," Open Access publications from Tilburg University urn:nbn:nl:ui:12-358916, Tilburg University.
  5. Richard Paap & Philip Hans Franses, 2000. "A dynamic multinomial probit model for brand choice with different long-run and short-run effects of marketing-mix variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 717-744.
  6. Marnik G. Dekimpe & Dominique M. Hanssens, 1995. "Empirical Generalizations About Market Evolution and Stationarity," Marketing Science, INFORMS, vol. 14(3_supplem), pages G109-G121.
  7. repec:fth:erroem:9907/a is not listed on IDEAS
  8. Marnik G. Dekimpe & Dominique M. Hanssens, 1995. "The Persistence of Marketing Effects on Sales," Marketing Science, INFORMS, vol. 14(1), pages 1-21.
  9. Dekimpe, M.G. & Hanssens, D., 1995. "Empirical generalizations about market evolution and stationarity," Open Access publications from Tilburg University urn:nbn:nl:ui:12-358840, Tilburg University.
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