Channel Pass-Through of Trade Promotions, Marketing Science
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.