Another Look at Price Promotion

Weekly sales at retail stores exhibit several patterns that the existing literature on price promotion does not fully capture. In this paper we develop a simple symmetric model where duopoly manufacturers distribute competing brands through a monopoly retailer to serve consumers with heterogeneous reservation prices. We show that the heterogeneity in consumers’ reservation prices coupled with the retailer’s market power is sufficient to resolve the deficiency in the literature. We then show that, while pricing patterns under this model differ significantly from those under a model where the retailer has no market power, the manufacturers’ expected profits are the same in both cases