Pricing Under Dynamic Competition When Loyal Consumers Stockpile

One goal of promotions for frequently purchased products is increasing short-term sales. Increases could be at competitors’ expense, coming from consumers with relatively weak brand preferences. However, increased sales from brand-loyal consumers could well cannibalize future sales of the promoted brand. An unintended consequence of promotions is that loyal consumers otherwise willing to pay high prices may strategically stockpile at low prices. What is its impact on firms’ profits? Who benefits from stockpiling? How should firms adapt their pricing to accommodate consumer stockpiling? For answers, we analyze an infinite horizon dynamic model of competition and derive the Markov perfect equilibrium pricing strategies that yield several managerial insights. We find strategic stockpiling does not reduce firms’ long-run profits when managers adopt pricing strategies we identify. Turning to strategies, stockpiling causes firms to move away from frequently promoting below the stockpiling threshold, but it leads to mass points at reservation price and stockpiling threshold. Stockpiling is beneficial to consumers who stockpile but hurts those that do not stockpile, whereas switchers remain largely unaffected. State-dependent pricing as a result of stockpiling leads to positive intertemporal price correlation, implying, counterintuitively, that in equilibrium, deep promotions should be followed by deep promotions.