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A Nested Logit Model of Strategic Promotion


  • Richards, Timothy J.


Retailers use sales "price promotions" for a number of potential reasons. There is relatively little research, however, on their strategic role among frequently consumed perishable products. Using a two-stage, nested logit model of retail equilibrium, we show that promotion will be most effective (ie. increase store-level sales) if products are highly differentiated, but stores are relatively similar. To test this hypothesis, we an oligopolistic model of promotion rivalry with category-level scanner data from the four largest supermarket retailers in a major U.S. metropolitan market. The results show that promotion has a greater impact on store share than product share, because the elasticity of substitution among stores is larger than the elasticity of substitution among products. Consequently, promotion has its greatest value in driving demand for differentiated products among stores that are similar. This finding supports the observed trend toward premium private label products being offered by supermarket retailers.

Suggested Citation

  • Richards, Timothy J., 2005. "A Nested Logit Model of Strategic Promotion," 2005 Annual meeting, July 24-27, Providence, RI 19336, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  • Handle: RePEc:ags:aaea05:19336

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    3. Michaela Draganska & Sanjog Misra & Victor Aguirregabiria & Pat Bajari & Liran Einav & Paul Ellickson & Dan Horsky & Sridhar Narayanan & Yesim Orhun & Peter Reiss & Katja Seim & Vishal Singh & Raphael, 2008. "Discrete choice models of firms’ strategic decisions," Marketing Letters, Springer, vol. 19(3), pages 399-416, December.
    4. William Allender & Timothy Richards, 2010. "Market Diversion and Market Power: California Eggs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(1), pages 37-58, February.
    5. Allender, William J. & Richards, Timothy J., 2009. "Measures of Brand Loyalty," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49536, Agricultural and Applied Economics Association.
    6. Anna Lu, 2017. "Consumer Stockpiling and Sales Promotions," Discussion Papers of DIW Berlin 1680, DIW Berlin, German Institute for Economic Research.
    7. Bartolj, Tjaša & Polanec, Sašo, 2012. "College major choice and ability: Why is general ability not enough?," Economics of Education Review, Elsevier, vol. 31(6), pages 996-1016.
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