Effects of Brand Loyalty on Competitive Price Promotional Strategies

This paper analyzes the role played by brand loyalty in determining optimal price promotional strategies used by firms in a competitive setting. Our objective is to explain how loyalties toward the competing brands influence whether or not firms would use price promotions in a product category. We also explain how loyalty differences can lead to variations in the depth and frequency with which price discounts are offered across brands in the same product category.It is shown that if all brands in a product category have high brand loyalty, the firms will not find it profitable to use price promotions. Furthermore, even if one brand has relatively low loyalty, price promotions are likely in that product category. The analysis predicts that the likelihood of use of price promotions increases with an increase in the number of competing brands in a product category. In the context of a market in which a brand with large brand loyalty competes with a brand with low brand loyalty, it is shown that equilibrium promotional strategies for the two brands are such that the stronger brand offers a larger discount than the weaker brand, but offers it less frequently. The results suggest that the weaker brand gains more from price promotions. The analysis helps us understand discounting patterns in markets where store brands, weak brands, or newly introduced natoinal brands compete against strong, well known, national brands. The findings are based on the unique perfect equilibrium in a finitely repeated game.