In non-vertically integrated channels manufacturers rely on incentives to influence the prices offered by channel partners such as wholesalers and retailers. One of the most common channel incentives is a trade promotion. Packaged goods manufacturers spend in excess of $75 billion annually on trade promotions with the goal of offering temporary discounts to end-consumers (Cannondale 2001). A common metric used by practitioners and academics to evaluate trade promotion effectiveness is pass-through. Although the effectiveness of trade promotions has been debated for decades, empirical research on the topic is scarce. Extant research has relied on data from one or two supermarket chains in a single market and managerial surveys. For this study we assemble a unique dataset containing information on prices, quantities, and promotions throughout the entire channel in a category. The data enable us to extend the empirical literature on pass-through in two important ways. First, we investigate how it varies across more than 1000 retailers in over 30 states. Second, we study pass-through at multiple levels of the distribution channel, allowing us to assess how channel intermediaries -- such as wholesalers and brokers -- influence pass-through. We find that the median pass-through elasticities are 0.75, 0.58, and 0.39, for the wholesaler, retailer, and total channel respectively. Thus, a 10% reduction in manufacturer price results in a 3.9% reduction in consumer price. At each of the levels in the channel large variances in the estimates of pass-through elasticities are observed. We therefore argue that average pass-through elasticities are only of limited tactical value to manufacturers. For example, the pass-through for a specific chain in California may be 0.98 while it is equal to 0.42 for the same chain in Nevada. The average of these values holds little meaning for a firm trying to evaluate and improve trade-promotion effectiveness. We investigate the sources of pass-through variation using various measures of cost and competition.

The authors develop a conceptual framework of the factors that motivate the retailer’s decision to rely on demand conditions and past prices in setting current and future prices. Specifically, they examine the circumstances under which retailers choose demand-based pricing versus past-price dependence for different brands and categories. Given scarce resources and costs of price adjustments, demand-based pricing is more likely when the customer-driven and firm-driven costs of adjusting pricing patterns are low or when the benefits of such adjustments are high. First, the customer-driven benefits of demand-based pricing are expected to be greater in categories with higher penetration and for brands with higher market share and higher demand sensitivity to price. Second, the firm-driven benefits are greater for categories with higher private-label share. Finally, the customer-driven costs are greater for expensive categories while the firm-driven costs are greater for categories with many SKUs. The empirical findings support the conceptual framework, implying that customer-driven and firm-driven benefits are the main stimulants in the retailer’s choice of demand-based pricing. In contrast, customer-driven and firm-driven costs significantly hinder retailer implementation of demand-based pricing. These insights enable retailers to identify problem areas and opportunities to improve the allocation of scarce pricing resources. The results also contribute to the ongoing debate in economics and marketing on the rationality of observed past-price dependence. While previous research points to the negative impact on gross margins of this practice, the authors find that retailers weigh the costs and benefits of demand-based pricing versus adhering to past- pricing patterns.

What are the drivers of retailer pricing tactics over time? Based on multivariate time-series analysis of two rich datasets we quantify the relative importance of competitive retailer prices, pricing history, brand demand, wholesale prices, and retailer category-management considerations as drivers of retail prices. Interestingly, competitive retailer prices account for less than 10% of the over-time variation in retail prices. Instead, pricing history, wholesale price, and brand demand are the main drivers of retail-price variation over time. Moreover, the influence of these price drivers on retailer pricing tactics is linked to retailer category margin. We find that demand-based pricing and category-management considerations are associated with higher retailer margins. In contrast, dependence on pricing history and pricing based on store traffic considerations imply lower retailer margins.

How do competitors react to each other's price-promotion and advertising attacks? What are the reasons for the observed reaction behavior? We answer these questions by performing a large-scale empirical study on the short-run and long-run reactions to promotion and advertising shocks in over 400 consumer product categories, over a four-year time span. Our results clearly show that the most predominant form of competitive response is passive in nature. When a reaction does occur, it is usually retaliatory in the same instrument, i.e., promotion attacks are countered with promotions, and advertising attacks are countered with advertising. There are very few long-run consequences of any type of reaction behavior. By linking reaction behavior to both cross and own effectiveness, we further demonstrate that passive behavior is often a sound strategy, while firms that do opt to retaliate often use ineffective instruments, resulting in "spoiled arms." Accommodating behavior is observed in only a minority of cases, and often results in a missed sales opportunity when promotional support is reduced. The ultimate impact of most promotion and advertising campaigns depends primarily on the nature of consumer response, not the vigilance of competitors.

The use of price promotions to stimulate brand and firm performance is increasing. We discuss how (i) the availability of longer scanner data time series, and (ii) persistence modeling, have lead to greater insights into the dynamic effects of price promotions, as one can now quantify their immediate, short-run, and long-run effectiveness. We review recent methodological developments, and illustrate how the analysis of numerous brands and product categories has resulted in various empirical generalizations. Finally, we argue that persistence modeling should not only be applied to traditional performance metrics such as sales, but also to metrics such as firm value and customer equity.

While price promotions have increased in both commercial use and quantity of academic research over the last decade, most of the attention has focused on their effects on brand choice and brand sales. By contrast, little is known about the conditions under which price promotions expand short-run and long-run category demand, even though the benefits of category expansion can be substantial to manufacturers and retailers alike. This paper studies the category-demand effects of consumer price promotions across 560 consumer product categories over a four-year period. The data describe national sales in Dutch supermarkets and cover virtually the entire marketing mix, i.e., prices, promotions, advertising, distribution, and new-product activity. We focus on the estimation of main effects (i.e., the dynamic category expansive impact of price promotions) as well as the moderating effects of marketing intensity and competition (both conduct and structure) on short- and long-run promotional effectiveness. The research design uses modern multivariate time-series analysis to disentangle short-run and long-run effects. First, we conduct a series of unit-root tests to determine whether or not category demand is stationary or evolving over time. The results are incorporated in the specification of vector-autoregressive models with exogenous variables (VARX models). The impulse-response functions derived from these VARX models provide estimates of the short- and long-term effects of price promotions on category demand. These estimates, in turn, are used as dependent variables in a series of second-stage regressions that assess the explanatory power of marketing intensity and competition. Several model validation tests support the robustness of the empirical findings. We present our results in the form of empirical generalizations on the main effects of price promotions on category demand in the short and the long run, and through statistical tests on how these effects change with marketing intensity and competition. The findings generate an overall picture of the power and limitations of consumer price promotions in expanding category demand, as follows. Category demand is found to be predominantly stationary, either around a fixed mean or a deterministic trend. While the total net short-term effects of price promotions are generally strong, with an average elasticity of 2.21 and a more conservative median elasticity of 1.75, they rarely exhibit persistent effects. Instead, the effects dissipate over a time period lasting approximately ten weeks on average, and their long-term impact is essentially zero. By contrast, the successful introduction of new products into a category is more frequently associated with a permanent category demand increase. Several moderating effects on price-promotion effectiveness exist. More frequent promotions increase their effectiveness, but only in the short run. The use of non-price advertising reduces the category demand effects of price promotions, both in the short run and in the long run. Competitive structure matters as well: the less oligopolistic the category, the smaller the short-run effectiveness of price promotions. At the same time, we find that the dominant form of competitive reaction, either in price promotion or in advertising, is no reaction. Short-run category demand effectiveness of price promotions is lower in categories experiencing major new-product introductions. Finally, both the short- and long-run price promotion effectiveness is higher in perishable product categories. The paper discusses several managerial implications of these empirical findings, and suggests various avenues for future research. Overall, we conclude that the power of price promotions lies primarily in the preservation of the status quo in the category.