Are Sale Signs Less Effective When More Products Have Them?, Marketing Science
Anderson and Simester (1998) recently presented an equilibrium model predicting that customers who lack knowledge of market prices rely upon point of purchase sale signs to help evaluate posted prices. Their model predicts that sale signs increase demand but that the increase is smaller when more products have them. This moderating effect is critical to their argument. It regulates how many sale signs stores use and makes customer reliance on these cues an equilibrium strategy. We analyze data from a variety of sources, including historical data from a women's clothing catalog, a field study in that catalog, survey responses to catalog stimuli, and grocery store data for frozen juice, toothpaste and tuna. The analysis yields three conclusions. First, sale signs are less effective at increasing demand when more items have them. Second, total category sales are maximized when some but not all products have sale signs. Third, placing a sale sign on a product reduces the perceived likelihood that the product will be available at a lower price in the future, but the effect is smaller when more products have sale signs. By ruling out alternative hypotheses, the second and third conclusions suggest that moderation of the sale sign effect is in part due to Anderson and Simester's (1998) prediction that sale signs lose credibility when used on more products. The consistency of these findings is particularly reassuring given that limitations in the data do not extend across all of the data sources. Together the findings offer evidence supporting Anderson and Simester's equilibrium justification for customer reliance upon sale signs. The results are also of considerable practical importance to retailers. The demand effects that we observe are large, in some cases exceeding 50%.
Eric T. Anderson, Duncan Simester
Anderson, Eric T., and Duncan Simester. 2001. Are Sale Signs Less Effective When More Products Have Them?. Marketing Science. 20(2): 121-140.