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A Nested Logit Model of Strategic Promotion

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  • Richards, Timothy J.

Abstract

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
    DOI: 10.22004/ag.econ.19336
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    6. 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.
    7. Alessandro Bonanno & Carlo Russo & Luisa Menapace, 2018. "Market power and bargaining in agrifood markets: A review of emerging topics and tools," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 6-23, December.
    8. Ashutosh Prasad & Brian T. Ratchford & Sonika Singh, 2021. "Consumer Choice and Multi-Store Shopping: an Empirical Investigation," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 7(3), pages 74-89, October.
    9. Rebecca Cleary & Rigoberto Lopez, 2014. "Supermarket responses to Wal-Mart Supercenter expansion: a structural approach," Empirical Economics, Springer, vol. 47(3), pages 905-925, November.
    10. Guillermo Gallego & Huseyin Topaloglu, 2014. "Constrained Assortment Optimization for the Nested Logit Model," Management Science, INFORMS, vol. 60(10), pages 2583-2601, October.
    11. Minakshi Trivedi & Dinesh K. Gauri & Yu Ma, 2017. "Measuring the Efficiency of Category-Level Sales Response to Promotions," Management Science, INFORMS, vol. 63(10), pages 3473-3488, October.
    12. Carlo Russo & Rachael Goodhue, 2018. "Farmgate prices, retail prices, and supermarkets' pricing decisions: An integrated approach," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 24-43, December.
    13. Paulo Albuquerque & Bart J. Bronnenberg, 2012. "Measuring the Impact of Negative Demand Shocks on Car Dealer Networks," Marketing Science, INFORMS, vol. 31(1), pages 4-23, January.
    14. Mitra, Debanjan & Fay, Scott, 2010. "Managing Service Expectations in Online Markets: A Signaling Theory of E-tailer Pricing and Empirical Tests," Journal of Retailing, Elsevier, vol. 86(2), pages 184-199.
    15. 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.
    16. Yonezawa, Koichi & Richards, Timothy J., 2016. "Competitive Package Size Decisions," Journal of Retailing, Elsevier, vol. 92(4), pages 445-469.
    17. Anna Lu, 2017. "Consumer Stockpiling and Sales Promotions," Discussion Papers of DIW Berlin 1680, DIW Berlin, German Institute for Economic Research.
    18. 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.
    19. repec:lic:licosd:27411 is not listed on IDEAS
    20. Gauri, Dinesh K. & Ratchford, Brian & Pancras, Joseph & Talukdar, Debabrata, 2017. "An Empirical Analysis of the Impact of Promotional Discounts on Store Performance," Journal of Retailing, Elsevier, vol. 93(3), pages 283-303.

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