Measuring The Effects Of Generic Price And Non-Price Promotional Activities: The Case Of Washington Apples

This paper develops a monthly domestic demand and supply equilibrium model for Washington apples that can be used to assess the effectiveness of price and non-price promotional activities. The econometric methodology employed takes into account market differences across the U.S. and is based on data pertaining to individual retail stores located throughout the U.S. The period of analysis is from September 1990 through August 2000 on a regional basis. A unique feature of the model is its explicit allowance for multiplier effects to exist between the level of print media (newspaper ad and flyers) expenditures provided by the Washington State Apple Commission (WAC) in support of apple demand and supplementary funds provided by retailers in support of apple promotion. In particular the model allows for the fact that Commission funds oftentimes represent only a relatively small fraction of the overall print media expenditures made in support of apple sales, and that Commission funds are often effectively only "pump priming" or serve as inducements for additional promotional activities by other entrepreneurs in the marketing chain. Also, the subset of promotional activities (print media and price reductions) provided by retailers is modeled in a dynamic fashion, whereby market conditions feedback affects the level of apple promotion provided by retailers. The overall model includes a set of retail demand equations, a set of retail-F.O.B. price linkage equations, a set of ad lines - WAC Ad buys linkage equations, and an aggregate industry supply function. Additional factors such as asymmetry in retail-F.O.B. price response, the effects of information technology in retail pricing, and the effects of the large crops and the Asian and the Mexican crises on domestic supply are all simultaneously considered. Results of this analysis indicate that, in the aggregate, price promotion is a significant factor positively impacting apple sales. Furthermore, price promotion elasticities were relatively high when compared to non-price promotional activities, leading to a conclusion that greater gains with respect to returns on promotional investment may occur when retail price reductions are pursued. Despite an increased domestic supply and the effects of the Mexican and the Asian crises, among the non-price promotional activities, results indicated that both non-trade (TV and Radio) and trade-related efforts (in store demonstrations, point of sale displays, promotional give-aways, and ad buys) have contributed to increased demand for Washington apples. Sensitivity analysis of trade and non-trade expenditures indicated that trade-related activities were more effective in increasing demand at current expenditure levels relative to non-trade activities. Promotional efforts in the form of billboards, food service expenditures, and other miscellaneous activities, which the industry also carried out during the historical period of analysis, did not have a measurable impact on demand in any of the regions. It was also found that WAC ad buy expenditures resulted in a multiplier effect on the total number of ad lines. While the direct effect of these Commission expenditures on demand would be relatively small without the supplementary efforts forthcoming from retailers, the fact that retailers multiplied the Commission's expenditures into a substantially larger promotional effort resulted in a significant positive effect on apple sales when viewing the promotion program as a whole. Key words: price and non price promotion, trade and non trade activities