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Stochastic Models of a Price Promotion

Author

Listed:
  • Yoram Kinberg

    (Chase Manhattan Bank)

  • Ambar G. Rao

    (New York University)

Abstract

Stochastic models of a commonly used consumer marketing tool--a price off or price promotion--are developed. Two cases are considered: first, when the duration of the promotion is unknown to customers, and second, when it is known. The optimal duration is derived in both cases as a function of the probability of purchasers of competitive brands switching to the promoted brand, the increased quantity purchased due to the "bargain" and the possible increase in the consumption rate as a consequence. A numerical illustration and a discussion of promotion desirability at different times is presented. Finally, a procedure for estimating model parameters and testing model assumptions is discussed.

Suggested Citation

  • Yoram Kinberg & Ambar G. Rao, 1975. "Stochastic Models of a Price Promotion," Management Science, INFORMS, vol. 21(8), pages 897-907, April.
    • Handle: RePEc:inm:ormnsc:v:21:y:1975:i:8:p:897-907
    DOI: 10.1287/mnsc.21.8.897
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    Cited by:

    1. Gabriel Bitran & René Caldentey, 2003. "An Overview of Pricing Models for Revenue Management," Manufacturing & Service Operations Management, INFORMS, vol. 5(3), pages 203-229, August.

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