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The Effects of Retailer and Consumer Response on Optimal Manufacturer Advertising and Trade Promotion Strategies

Author

Listed:
  • Scott A. Neslin

    (Amos Tuck School of Business Administration, Dartmouth College, Hanover, New Hampshire 03755)

  • Stephen G. Powell

    (Amos Tuck School of Business Administration, Dartmouth College, Hanover, New Hampshire 03755)

  • Linda Schneider Stone

    (Curtis L. Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

Abstract

This research examines how retailer and consumer responses influence a manufacturer's optimal advertising and trade promotion plans. We develop a dynamic optimization model which considers the actions of the manufacturer, retailers, and consumers. The manufacturer attempts to maximize its profits by advertising directly to consumers and offering periodic trade deal discounts to the retailer in the hope that the retailer will in turn "pass through" a retailer promotion to the consumer. We show how the manufacturer's optimal allocation depends on consumer response to advertising, consumer response to retailer promotions, retailer inventory carrying cost, and retailer passthrough behavior. For example, we find that retailer carrying costs and promotion wearout play a central role in constraining expenditures on trade promotions. We predict that as trade promotions are designed to eliminate forward buying, manufacturers will find it in their interest to promote more steeply. We also find a natural tendency for advertising and trade dealing to substitute for each other in an optimal plan.

Suggested Citation

  • Scott A. Neslin & Stephen G. Powell & Linda Schneider Stone, 1995. "The Effects of Retailer and Consumer Response on Optimal Manufacturer Advertising and Trade Promotion Strategies," Management Science, INFORMS, vol. 41(5), pages 749-766, May.
    • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:5:p:749-766
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    File URL: http://dx.doi.org/10.1287/mnsc.41.5.749
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    Citations

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    Cited by:

    1. F. J. Arcelus & G. Srinivasan, 2006. "Marketing|inventory interactions in the characterization of retailer response to manufacturer trade deals," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(7), pages 537-547.
    2. Anselmi, Kenneth, 2000. "A Brand's Advertising and Promotion Allocation Strategy: The Role of the Manufacturer's Relationship with Distributors as Moderated by Relative Market Share," Journal of Business Research, Elsevier, vol. 48(2), pages 113-122, May.
    3. Karray Salma & Martín-Herrán Guiomar, 2008. "Investigating the Relationship Between Advertising and Pricing in a Channel with Private Label Offering: A Theoretic Model," Review of Marketing Science, De Gruyter, vol. 6(1), pages 1-39, August.
    4. Gomez, Miguel I. & Rao, Vithala R. & Yuan, Hong, 2009. "A Market Experiment on Trade Promotion Budget and Allocation," Working Papers 55928, Cornell University, Department of Applied Economics and Management.
    5. Etilé, F.; & Lecocq, S.; & Boizot-Szantaï, C.;, 2018. "The Incidence of Soft-Drink Taxes on Consumer Prices and Welfare:Evidence from the French “Soda Taxâ€," Health, Econometrics and Data Group (HEDG) Working Papers 18/13, HEDG, c/o Department of Economics, University of York.
    6. Kopalle Praveen K & Neslin Scott A, 2003. "The Economic Viability of Frequency Reward Programs in a Strategic Competitive Environment," Review of Marketing Science, De Gruyter, vol. 1(1), pages 1-41, August.
    7. Michel Wedel & Jie Zhang & Fred Feinberg, 2015. "Implementing Retail Category Management: a Model-Based Approach to Setting Optimal Markups," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 2(2), pages 165-176, June.
    8. repec:eee:jouret:v:89:y:2013:i:2:p:140-157 is not listed on IDEAS
    9. Praveen K. Kopalle & Carl F. Mela & Lawrence Marsh, 1999. "The Dynamic Effect of Discounting on Sales: Empirical Analysis and Normative Pricing Implications," Marketing Science, INFORMS, vol. 18(3), pages 317-332.
    10. Xavier Drèze & David R. Bell, 2003. "Creating Win–Win Trade Promotions: Theory and Empirical Analysis of Scan-Back Trade Deals," Marketing Science, INFORMS, vol. 22(1), pages 16-39, November.
    11. Jorge M. Silva-Risso & Randolph E. Bucklin & Donald G. Morrison, 1999. "A Decision Support System for Planning Manufacturers' Sales Promotion Calendars," Marketing Science, INFORMS, vol. 18(3), pages 274-300.
    12. Sridhar Moorthy, 2005. "A General Theory of Pass-Through in Channels with Category Management and Retail Competition," Marketing Science, INFORMS, vol. 24(1), pages 110-122, August.
    13. Mei, Wanxia & Du, Li & Niu, Baozhuang & Wang, Jincheng & Feng, Jiejian, 2016. "The effects of an undisclosed regular price and a positive leadtime in a presale mechanism," European Journal of Operational Research, Elsevier, vol. 250(3), pages 1013-1025.
    14. Ananth. V. Iyer & Jianming Ye, 2000. "Assessing the Value of Information Sharing in a Promotional Retail Environment," Manufacturing & Service Operations Management, INFORMS, vol. 2(2), pages 128-143, February.
    15. K. Sudhir, 2001. "Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer," Marketing Science, INFORMS, vol. 20(3), pages 244-264, October.
    16. Leigh McAlister, 2007. "—Cross-Brand Pass-Through: Fact or Artifact?," Marketing Science, INFORMS, vol. 26(6), pages 876-898, 11-12.
    17. repec:eee:ijrema:v:34:y:2017:i:3:p:694-716 is not listed on IDEAS
    18. Fabrice Etilé & Sebastien Lecocq & Christine Boizot-Szantai, 2018. "The Incidence of Soft-Drink Taxes on Consumer Prices and Welfare: Evidence from the French " Soda Tax"," PSE Working Papers halshs-01808198, HAL.
    19. Venkatesh Shankar & Ruth N. Bolton, 2004. "An Empirical Analysis of Determinants of Retailer Pricing Strategy," Marketing Science, INFORMS, vol. 23(1), pages 28-49, May.

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