Competitive Dynamics of Price Promotions

University of Chicago to the first and third authors is gratefully acknowledged. The usual disclaimer applies. COMPETITIVE DYNAMICS OF PRICE PROMOTIONS Given the large dollar amounts at stake, manufacturers and retailers devote considerable time and effort designing and updating promotion calendars. While designing the promotion schedule, some questions that managers need to address are: How does an unusually large promotional discount offered impact the timing of the next “sale ” and the depth of discount to be offered? Should a deep discount by a competitor affect the timing or depth of the next promotion? More generally, should one respond to competitive promotion by adjusting the timing of the next “sale”, the discount to be offered, or both? To address these issues, we examine a duopolistic market wherein brands repeatedly compete for heterogeneous consumers: the loyal consumers buy from only one of the brands; the semi-loyal consumers consider both brands but are willing to pay a premium for the brand purchased last period; the switchers value the two brands identically and buy the lowest priced brand. Unlike static models of price promotion, our model incorporates dynamics by explicitly considering “purchase event feedback”: