Asymmetric Store Positioning and Promotional Advertising Strategies: Theory and Evidence
Asymmetrically positioned retailers, who vary in the quality/in-store service offered, are increasingly using promotional advertising—the practice of advertising sale prices on familiar merchandise lines—to compete for customers who are willing to comparison shop. The objective of this paper is to examine the role of promotional advertising for stores that vary in their quality positioning in competing for customers using a game-theoretic model. Our focus is on two key retail promotional advertising decisions: the frequency with which to advertise price reductions and the accompanying depth of discount. We consider a stylized duopolistic retail market with the two stores that differ in their service positioning. We assume that each store enjoys a relative advantage in serving a subset or segment of customers who regularly visit it and whom we call “patrons” of the store. We assume that it costs more to shop at the less-frequented store. We further assume that consumers are only partially informed about the prevailing retail prices—while they perfectly know the posted price at the store that they patronize, they are uncertain about the price at the other store and have rational expectations about these prices. Consumers in this market differ on three dimensions: preference for service, shopping costs, and store switching costs. We explicitly consider two consumer segments differing in their willingness to pay for service. Furthermore, we assume store switching is more costly for the high-valuation segment. We allow for within-segment heterogeneity by assuming that consumers differ in their shopping costs. Our analysis shows that if promotional advertising is not “too costly,” the equilibrium strategies of the competing retailers entail occasionally posting its “regular” price but not advertising that price and on other occasions posting its “sale” price and advertising that price. The analysis also suggests that promotional advertising is driven by “offensive” (traffic-building) as well as “defensive” (consumer-retention) considerations. Furthermore, the relative importance of offensive and defensive considerations is influenced by the service positioning of the stores. Specifically, relative to the low-service store, promotional advertising by the high-service store is driven more by offensive consideration than defensive consideration. Finally, a store's service positioning impacts its frequency of promotional advertising and the depth of discount that it offers during “sale.” Specifically, relative to the low-service store, the high-service store offers advertised sales more frequently but with shallower discounts. These results follow from the fact that differences in service positioning lead to a natural consumer “self-selection.” Specifically, the consumer-mix of the high-service store comprises a higher fraction of the high-valuation consumers who are less sensitive to promotional advertising due to their higher store switching costs. Thus, if the low-service retailer were to build store traffic by targeting the customer mix of the high-service retailer (motivated by offensive consideration), it has to offer deeper discounts; yet the demand enhancement is lower. Thus, relative to the high-service store, promotional advertising is not that attractive for the low-service store. However, the low-service store still relies on offering discounted prices occasionally to retain its customer base. Thus when using promotional advertising to attract and retain customers, the high-service store should rely more on the “frequency cue,” while the low-quality store should rely more on the “magnitude cue.” We provide empirical support for the key predictions of our analytical model by collecting and analyzing retail promotional advertisements for stores that vary in their level of in-store service, published in major newspapers in a large U.S. metropolitan city. We collected data from 813 advertisements across 14 different product groups in the men’s and women's categories. The data are consistent with the model's predictions. Our theory and empirical analysis should be of interest to both academics and practitioners, particularly those in the area of channel management and promotional advertising.
Volume (Year): 21 (2002)
Issue (Month): 1 (October)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
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.:
- Jagmohan S. Raju & V. Srinivasan & Rajiv Lal, 1990. "The Effects of Brand Loyalty on Competitive Price Promotional Strategies," Management Science, INFORMS, vol. 36(3), pages 276-304, March.
- Kyle Bagwell & Michael Riordan, 1988.
"High and Declining Prices Signal Product Quality,"
808, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
- Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
- Gerard R. Butters, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 465-491.
- Ram C. Rao, 1991. "Pricing and Promotions in Asymmetric Duopolies," Marketing Science, INFORMS, vol. 10(2), pages 131-144.
- Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
- Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 27-41.
- Gabsewicz, Jean J. & Garella, Paolo G., 1987. "Price search and spatial competition," European Economic Review, Elsevier, vol. 31(4), pages 827-842, June.
- Steven Salop & Joseph Stiglitz, 1977. "Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 493-510.
- Rajiv Lal & Ram Rao, 1997. "Supermarket Competition: The Case of Every Day Low Pricing," Marketing Science, INFORMS, vol. 16(1), pages 60-80.
- Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
- K. Sridhar Moorthy, 1988. "Product and Price Competition in a Duopoly," Marketing Science, INFORMS, vol. 7(2), pages 141-168.
- Ram C. Rao & Ramesh V. Arjunji & B. P. S. Murthi, 1995. "Game Theory and Empirical Generalizations Concerning Competitive Promotions," Marketing Science, INFORMS, vol. 14(3_supplem), pages G89-G100.
- Gupta, Sunil & Cooper, Lee G, 1992. " The Discounting of Discounts and Promotion Thresholds," Journal of Consumer Research, Oxford University Press, vol. 19(3), pages 401-11, December.
- Duncan Simester, 1995. "Signalling Price Image Using Advertised Prices," Marketing Science, INFORMS, vol. 14(2), pages 166-188.
- Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 1-26.
- Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October.
- Greg M. Allenby & Peter E. Rossi, 1991. "Quality Perceptions and Asymmetric Switching Between Brands," Marketing Science, INFORMS, vol. 10(3), pages 185-204.
- Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
- Heckman, James J, 1979.
"Sample Selection Bias as a Specification Error,"
Econometric Society, vol. 47(1), pages 153-61, January.
- Shaffer, G. & Zhang, Z.J., 1994. "Competitive Coupon Targeting," Papers 94-02, Michigan - Center for Research on Economic & Social Theory.
- Bester, Helmut & Petrakis, Emmanuel, 1995. "Price competition and advertising in oligopoly," European Economic Review, Elsevier, vol. 39(6), pages 1075-1088, June.
- Dipak C. Jain & Naufel J. Vilcassim, 1991. "Investigating Household Purchase Timing Decisions: A Conditional Hazard Function Approach," Marketing Science, INFORMS, vol. 10(1), pages 1-23.
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:21:y:2002:i:1:p:74-96. 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: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.