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Why promotion strategies based on market basket analysis do not work

  • B. VINDEVOGEL

    ()

  • D. VAN DEN POEL

    ()

  • G. WETS

In text books as well as in the business literature, market basket analysis is often promoted as a means to obtain product associations to base a retailer’s promotion strategy on. They argue that associated products with a high lift/interest can be promoted effectively by only discounting just one of the two products. Implicitly, they argue that market basket analysis automatically identifies complements. In this research, we show that this implicit assumption does not hold. Our empirical analysis reveals that market basket analysis identifies as many substitutes as complements. Therefore, market basket analysis cannot be used to build a promotion expert system for retailers. Instead, we advice to base the promotion strategy on cross-price elasticities. We conduct this research using scanner data of a large European retailer. Multivariate time-series techniques are used to identify both short-run as well as long-run (persistent) effects of promotions.

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File URL: http://wps-feb.ugent.be/Papers/wp_04_262.pdf
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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 04/262.

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Length: 20 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:rug:rugwps:04/262
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Web page: http://www.ugent.be/eb

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  1. Jean-Pierre Dubé, 2004. "Multiple Discreteness and Product Differentiation: Demand for Carbonated Soft Drinks," Marketing Science, INFORMS, vol. 23(1), pages 66-81, September.
  2. repec:ner:tilbur:urn:nbn:nl:ui:12-358840 is not listed on IDEAS
  3. G. Dekimpe, Marnik & Hanssens, Dominique M. & Silva-Risso, Jorge M., 1998. "Long-run effects of price promotions in scanner markets," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 269-291, November.
  4. Evans, Lewis & Wells, Graeme, 1983. "An alternative approach to simulating var models," Economics Letters, Elsevier, vol. 12(1), pages 23-29.
  5. Marnik G. Dekimpe & Dominique M. Hanssens, 1995. "Empirical Generalizations About Market Evolution and Stationarity," Marketing Science, INFORMS, vol. 14(3_supplem), pages G109-G121.
  6. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
  7. repec:ner:tilbur:urn:nbn:nl:ui:12-358916 is not listed on IDEAS
  8. D. VAN DEN POEL & Jan J. DE SCHAMPHELAERE & G. WETS, 2003. "Direct and Indirect Effects of Retail Promotions," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 03/202, Ghent University, Faculty of Economics and Business Administration.
  9. Magid M. Abraham & Leonard M. Lodish, 1993. "An Implemented System for Improving Promotion Productivity Using Store Scanner Data," Marketing Science, INFORMS, vol. 12(3), pages 248-269.
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