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Why promotion strategies based on market basket analysis do not work

B. Vindevogel (), Dirk Van den Poel () and G. Wets
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G. Wets: -

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: 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.

Keywords: Market basket analysis; cross-price elasticities; promotion strategy; multivariate time-series techniques; retailing (search for similar items in EconPapers)
Date: 2004-10
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