Prices, promotions, and channel profitability: Was the conventional wisdom mistaken?
Because of the lack of empirical evidence supporting the shift of economic power from manufacturers to retailers, it has been claimed that the conventional wisdom that retailers benefit more from the use of consumer promotions was mistaken. This paper assesses this claim and examines how two different pricing approaches during manufacturers' instant price promotions targeted at consumers impact on channel profits in a bilateral monopoly. We found that manufacturers should only offer rebates when they keep their prior-to-promotion wholesale prices unchanged. Consistent with the conventional wisdom, retailers do indeed take the lion's share of the promotion incremental profits. Surprisingly, however, we found that in the largest part of the parameter space, manufacturers still earn more total channel profits than retailers over time. The theoretical and managerial implications of these findings are discussed.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Richard H. Thaler, 2008.
"Mental Accounting and Consumer Choice,"
INFORMS, vol. 27(1), pages 15-25, 01-02.
- Kamel Jedidi & Carl F. Mela & Sunil Gupta, 1999. "Managing Advertising and Promotion for Long-Run Profitability," Marketing Science, INFORMS, vol. 18(1), pages 1-22.
- Eric T. Anderson & Duncan I. Simester, 2004. "Long-Run Effects of Promotion Depth on New Versus Established Customers: Three Field Studies," Marketing Science, INFORMS, vol. 23(1), pages 4-20, February.
- Gerstner, Eitan & Hess, James D, 1991. "A Theory of Channel Price Promotions," American Economic Review, American Economic Association, vol. 81(4), pages 872-86, September.
- Kogan, Konstantin & Herbon, Avi, 2008. "A supply chain under limited-time promotion: The effect of customer sensitivity," European Journal of Operational Research, Elsevier, vol. 188(1), pages 273-292, July.
- Chakravarthi Narasimhan, 1984. "A Price Discrimination Theory of Coupons," Marketing Science, INFORMS, vol. 3(2), pages 128-147.
- Ault, Richard W, et al, 2000. "Rebates, Inventories, and Intertemporal Price Discrimination," Economic Inquiry, Western Economic Association International, vol. 38(4), pages 570-78, October.
- Jorgensen, Steffen & Taboubi, Sihem & Zaccour, Georges, 2003. "Retail promotions with negative brand image effects: Is cooperation possible?," European Journal of Operational Research, Elsevier, vol. 150(2), pages 395-405, October.
- Karray, Salma & Martín-Herrán, Guiomar, 2009. "A dynamic model for advertising and pricing competition between national and store brands," European Journal of Operational Research, Elsevier, vol. 193(2), pages 451-467, March.
- Baohong Sun, 2005. "Promotion Effect on Endogenous Consumption," Marketing Science, INFORMS, vol. 24(3), pages 430-443, July.
- Norris Bruce & Preyas Desai & Richard Staelin, 2006. "Enabling the Willing: Consumer Rebates for Durable Goods," Marketing Science, INFORMS, vol. 25(4), pages 350-366, 07-08.
- Vincent R. Nijs & Marnik G. Dekimpe & Jan-Benedict E.M. Steenkamps & Dominique M. Hanssens, 2001. "The Category-Demand Effects of Price Promotions," Marketing Science, INFORMS, vol. 20(1), pages 1-22, September.
- Paul R. Messinger & Chakravarthi Narasimhan, 1995. "Has Power Shifted in the Grocery Channel?," Marketing Science, INFORMS, vol. 14(2), pages 189-223.
- Murali Mantrala & Suman Basuroy & Shailendra Gajanan, 2005. "Do Style-Goods Retailers’ Demands for Guaranteed Profit Margins Unfairly Exploit Vendors?," Marketing Letters, Springer, vol. 16(1), pages 53-66, January.
- Puneet Manchanda & Asim Ansari & Sunil Gupta, 1999. "The “Shopping Basket”: A Model for Multicategory Purchase Incidence Decisions," Marketing Science, INFORMS, vol. 18(2), pages 95-114.
- Amrouche, Nawel & Zaccour, Georges, 2007. "Shelf-space allocation of national and private brands," European Journal of Operational Research, Elsevier, vol. 180(2), pages 648-663, July.
- Kusum L. Ailawadi & Praveen K. Kopalle & Scott A. Neslin, 2005. "Predicting Competitive Response to a Major Policy Change: Combining Game-Theoretic and Empirical Analyses," Marketing Science, INFORMS, vol. 24(1), pages 12-24, September.
- Daniel Hosken & David Reiffen, 2004. "How Retailers Determine Which Products Should Go on Sale: Evidence From Store-Level Data," Journal of Consumer Policy, Springer, vol. 27(2), pages 141-177, June.
- Eunkyu Lee & Richard Staelin, 1997. "Vertical Strategic Interaction: Implications for Channel Pricing Strategy," Marketing Science, INFORMS, vol. 16(3), pages 185-207.
- Shuba Srinivasan & Koen Pauwels & Dominique M. Hanssens & Marnik G. Dekimpe, 2004. "Do Promotions Benefit Manufacturers, Retailers, or Both?," Management Science, INFORMS, vol. 50(5), pages 617-629, May.
- Meghan Busse & Jorge Silva-Risso & Florian Zettelmeyer, 2006. "$1,000 Cash Back: The Pass-Through of Auto Manufacturer Promotions," American Economic Review, American Economic Association, vol. 96(4), pages 1253-1270, September.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:211:y:2011:i:2:p:415-425. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.