Two essays on the implications of demand state dependence on pricing decisions

Thesis (Ph. D.)--University of Rochester. William E. Simon Graduate School of Business Administration, 2012.Marketing strategies that firms adopt are based on consumers’ response in the marketplace when they face and interact with these strategies. This dissertation examines the tendency of consumers to repeat their last purchase choices and the implications of this type of behavior on pricing related strategies of consumer packaged goods brand manufacturers. The first essay is a theory based empirical investigation about the commonly observed practice of brands offering temporary price promotions. There have been many theories that attempt to explain the popularity of price promotions as a marketing tool but with very few exceptions they are disconnected from choice dynamics. We examine the empirical support of a recent theory that connects price promotions with demand state dependence. In our investigation we measure how much each brand benefits from the consumers’ tendency to repeat purchase and we examine the connection between this measure (AMEL) and the brands’ price promotional frequencies. Our extensive sample includes all major brands from twenty product categories of frequently purchased goods and twenty stores in two separate geographical markets. Our empirical model accounts explicitly for the dependence of price promotions on demand response and vice versa. In summary, we find significant and robust evidence that brands which gainmore from consumers’ repeat purchase behavior are offered on promotion formore weeks on average. We also demonstrate the value of our proposed estimation algorithm over simpler, two-step, approaches. In the second essay we examine consumers’ state dependence not only to specific choice alternatives but also to parent brands that cover multiple sub-brands. Using a structural, forward looking, pricing model for multiproduct firms, we explore the implications of parent brand state dependence on equilibrium prices and firm profitability through counterfactual experiments. Empirically, we examine household level choice data from the category of yogurt and estimate state dependence to both the parent brand and the sub-brand level. We find evidence of parent brand state dependence for the category of yogurt. Its impact on the market equilibrium is to push prices downwards, because firms invest in future demand, and increase profitability of multiproduct firms, because per period demand increases