IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v23y2004i1p4-20.html
   My bibliography  Save this article

Long-Run Effects of Promotion Depth on New Versus Established Customers: Three Field Studies

Author

Listed:
  • Eric T. Anderson

    () (Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208)

  • Duncan I. Simester

    () (Sloan School of Management, Massachusetts Institute of Technology, 38 Memorial Drive, Cambridge, Massachusetts 02142)

Abstract

We use the results of three large-scale field experiments to investigate how the depth of a current price promotion affects future purchasing of first-time and established customers. While most previous studies have focused on packaged goods sold in grocery stores, we consider durable goods sold through a direct mail catalog. The findings reveal different effects for first-time and established customers. Deeper price discounts in the current period future purchases by first-time customers (a positive long-run effect) but future purchases by established customers (a negative long-run effect). Overall, the results show evidence of several long-run effects: forward buying, selection, customer learning, and increased deal sensitivity. Short-run metrics that ignore these effects overstate the overall change in demand for established customers. The implication is that if prices are set based on short-run elasticity, then they will be too low. Among first-time customers, the short-run metrics underestimate the total increase in demand. If prices are set based on short-run elasticity, then they will be too high.

Suggested Citation

  • 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.
  • Handle: RePEc:inm:ormksc:v:23:y:2004:i:1:p:4-20
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.1030.0040
    Download Restriction: no

    References listed on IDEAS

    as
    1. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
    2. 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.
    3. Eric T. Anderson & Duncan I. Simester, 2001. "Are Sale Signs Less Effective When More Products Have Them?," Marketing Science, INFORMS, vol. 20(2), pages 121-142, March.
    4. J. Jeffrey Inman & Leigh McAlister, 1993. "A Retailer Promotion Policy Model Considering Promotion Signal Sensitivity," Marketing Science, INFORMS, vol. 12(4), pages 339-356.
    5. G. Dekimpe, Marnik & Hanssens, Dominique M. & Silva-Risso, Jorge M., 1998. "Long-run effects of price promotions in scanner markets," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 269-291, November.
    6. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    7. 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.
    8. Aradhna Krishna, 1992. "The Normative Impact of Consumer Price Expectations for Multiple Brands on Consumer Purchase Behavior," Marketing Science, INFORMS, vol. 11(3), pages 266-286.
    9. Kyle Bagwell, 1987. "Introductory Price as a Signal of Cost in a Model of Repeat Business," Review of Economic Studies, Oxford University Press, vol. 54(3), pages 365-384.
    10. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    11. Inman, J Jeffrey & McAlister, Leigh & Hoyer, Wayne D, 1990. " Promotion Signal: Proxy for a Price Cut?," Journal of Consumer Research, Oxford University Press, vol. 17(1), pages 74-81, June.
    12. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    13. Tülin Erdem & Michael P. Keane, 1996. "Decision-Making Under Uncertainty: Capturing Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets," Marketing Science, INFORMS, vol. 15(1), pages 1-20.
    14. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    15. Bagwell, Kyle & Riordan, Michael H, 1991. "High and Declining Prices Signal Product Quality," American Economic Review, American Economic Association, vol. 81(1), pages 224-239, March.
    16. Gurumurthy Kalyanaram & Russell S. Winer, 1995. "Empirical Generalizations from Reference Price Research," Marketing Science, INFORMS, vol. 14(3_supplem), pages 161-169.
    17. Aradhna Krishna, 1994. "The Impact of Dealing Patterns on Purchase Behavior," Marketing Science, INFORMS, vol. 13(4), pages 351-373.
    18. Thompson, Patrick A & Noordewier, Thomas, 1992. "Estimating the Effects of Consumer Incentive Programs on Domestic Automobile Sales," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 409-417, October.
    19. Duncan Simester, 1995. "Signalling Price Image Using Advertised Prices," Marketing Science, INFORMS, vol. 14(2), pages 166-188.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:23:y:2004:i:1:p:4-20. 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). General contact details of provider: http://edirc.repec.org/data/inforea.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.