The Rational Effect of Price Promotions on Sales and Consumption

João L. Assunção and Robert J. Meyer
Additional contact information
João L. Assunção: Graduate Business School, Columbia University, 513 Uris Hall, New York, New York 10027
Robert J. Meyer: Wharton School of Business, University of Pennsylvania, Philadelphia, Pennsylvania 19104

Management Science, 1993, vol. 39, issue 5, 517-535

Abstract: We explore the rational effect of price variation on sales and consumption in markets where consumers are uncertain about the future price of goods. We first derive an optimal ordering policy which expresses the amount a consumer should purchase and consume in a given period as a function of the observed price of the good, the distribution of future prices, and the nature of his or her inventory. This policy extends previous normative models of inventory control, such as those by Golabi (1985) and Kalymon (1970) to the case where the amount to consume in a given period is an explicit decision variable and prices follow a first-order stochastic process. We then use this model to explore how changes in the long-run frequency and temporal correlations of price promotions should normatively affect the contemporaneous relationship between purchase, consumption and price. Among the predictions which follow from the model are that consumption should rationally increase with the size of existing inventories, the short-term sensitivity of sales to prices should be greater than that of consumption to price, and this discrepancy increases with decreases in the temporal correlation of price deals and the long-term relative frequency of price deals.

Keywords: marketing: buyer behavior; pricing; promotion (search for similar items in EconPapers)
Date: 1993
References: Add references at CitEc
Citations: View citations in EconPapers (54)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.39.5.517 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:39:y:1993:i:5:p:517-535

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().