A Hierarchical Bayes Error Correction Model to Explain Dynamic Effects of Price Changes

Dennis Fok, Richard Paap, Csilla Horváth and Philip Hans Franses

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: The authors put forward a sales response model to explain the differences in immediate and dynamic effects of promotional prices and regular prices on sales. The model consists of a vector autoregression rewritten in error-correction format which allows to disentangle the immediate effects from the dynamic effects. In a second level of the model, the immediate price elasticities, the cumulative promotional price elasticity and the long-run regular price elasticity are correlated with various brand-speciffic and category-speciffic characteristics. The model is applied to seven years of data on weekly sales of 100 different brands in 25 product categories. We find many significant moderating effects on the elasticity of price promotions. Brands in categories that are characterized by high price differentiation and that constitute a lower share of budget are less sensitive to price discounts. Deep price discounts turn out to increase the immediate price sensitivity of customers. We also find significant effects for the cumulative elasticity. The immediate effect of a regular price change is often close to zero. The long-run effect of such a decrease usually amounts to an increase in sales. This is especially true in categories characterized by a large price dispersion, frequent price promotions and hedonic, non-perishable products.

Keywords: hierarchical bayes; marketing mix; promotional and regular price; sales; short and long-term effects; vector autoregression (search for similar items in EconPapers)
JEL-codes: C44 M M31 (search for similar items in EconPapers)
Date: 2005-09-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: A hierarchical Bayes error correction model to explain dynamic effects (2004)
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