Competitive Price Promotions With Multi-Product Retailers

By Rajiv LalJ. Miguel Villas-Boas
1994| Working Paper No. 1303

In this paper we study retail price promotions and manufacturer trade deals in markets with single or multiple product retailers. We find that models that do not account for the existence of retailers overestimate the depth of promotions. In situations where retailers carry more than one competing brand, we show that the promotions across brands are not independent. Moreover, it is a dominant strategy for manufacturers to distribute through several retailers even though their profits might end up lower than if each retailer carried only one product. Finally, the structure of the market is crucial to the characterization of the equilibrium. Depending on the relative sizes of the various market segments (in terms of loyalty to manufacturer, retailer, or the pair manufacturer-retailer), we show that sometimes retailers offer the same discount on different products but at other times, they offer a smaller discount on a brand supported by a bigger trade deal. We also present results on the effects of changes in the sizes of the different market segments on the depth of price promotions and trade deals and on passthrough. Finally, we compare these results for single vs. multi-product retailers.