Dynamic Effects of Price Promotions: Field Evidence, Consumer Search, and Supply-Side Implications

Dynamic Effects of Price Promotions: Field Evidence, Consumer Search, and Supply-Side Implications

By Andres Elberg, Pedro M. Gardete, Rosario Macera, Carlos Noton
July 2018Working Paper No. 3401

This paper investigates the dynamic effects of price promotions in a retail setting through the use of a large-scale field experiment which involved varying the promotion depths of 170 products across 17 categories in 10 supermarkets of a major retailer in Chile. In the intervention phase of the experiment, customers were exposed to a promotion schedule that differed only on promotional depths: treated customers were exposed to deep discounts (approximately 30%), whereas control customers were exposed to shallow discounts (approximately 10%). In the subsequent measurement phase, the promotion schedule held discount levels constant across groups. We find that treated customers were 22.4% more likely to buy promoted items than their control counterparts, despite facing the same promotional deals. Strikingly, the magnitude of the dynamic effects of price promotions (when promotional depths are equal across conditions) is 61% of the promotional effects induced by offering shallow vs. deep discounts during the intervention phase. The result is robust to other concurrent dynamic forces, including consumer stockpiling behavior and state dependence. We use the experimental variation and historical promotional activities to inform a demand-side model in which consumers search for deals, and a supply-side model in which firms compete for those consumers. We find that small manufacturers can benefit from heightened promotion sensitivity by using promotions to induce future consideration. However, when unit margins are high, heightened promotion sensitivity leads to fierce competition, making all firms worse off.

Previously titled Dynamic Effects of Price Promotions: A Large-Scale Field Experiment