Dynamic Effects of Price Promotions: A Large-Scale Field Experiment

Andres Elberg, Pedro M. Gardete, Rosario Macera and Carlos Noton
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Andres Elberg: Universidad Diego Portales
Pedro M. Gardete: Stanford University
Rosario Macera: Pontificia Universidad Catolica

Research Papers from Stanford University, Graduate School of Business

Abstract: We investigate whether promotion depth has dynamic effects on subsequent promotion sensitivity. In a large-scale field experiment we vary the promotion depth of top sale products across 17 categories in 12 supermarket stores. During the first half of the experiment we manipulate promotion depth by assigning staggered promotions with 30% and 10% discounts to treated and control stores, respectively. In the second half the staggering scheme assigns an even 10% to all stores. We find that treated customers are 14% more likely to buy promoted items during the second half of the experiment, and that the basket proportion of promoted items bought increases in approximately 21%. This purchase behaviour is consistent with a model of sequential search in which higher discounts alter the beliefs of rational consumers, who favours search over promoted items during the second half. The heightened promotion sensitivity leaves retailers facing a sort of prisoners dilemma: every retailer would be better off in the absence of promotions, deviations, however, are profitable.

Date: 2016-01
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