Price Promotions in Choice Models

John R. Howell (), Sanghak Lee () and Greg M. Allenby ()
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John R. Howell: Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802
Sanghak Lee: Tippie College of Business, University of Iowa, Iowa City, Iowa 52242
Greg M. Allenby: Fisher College of Business, Ohio State University, Columbus, Ohio 43210

Marketing Science, 2016, vol. 35, issue 2, 319-334

Abstract: Promotions are used in marketing to increase sales and drive profits by temporarily decreasing the price per unit of a good. Some price promotions apply to all quantities (20% off), some have limits on the number of units that can be purchased at a reduced price, and others only offer the discount if the volume purchased is sufficiently high. We develop a model of price promotions in the context of a direct utility model where its effects are incorporated through the budget constraint. Price promotions complicate the estimation and analysis of direct utility models because they induce kinks and points of discontinuity in the budget set. We propose a Bayesian approach to addressing these irregularities and demonstrate the ability of the direct utility model to be used in counterfactual analyses of price promotions. We investigate the stability of utility function estimates for consumers under alternative price promotions, and find that the majority of the effect of a price promotion is through the budget set, not through changes in the utility function. We also investigate the economic value of customized price promotions where the customization includes the value and format of the offer.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0948 .

Keywords: utility theory; Bayesian estimation; nonlinear pricing; irregular budget sets (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:35:y:2016:i:2:p:319-334

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