IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v35y2016i2p319-334.html
   My bibliography  Save this article

Price Promotions in Choice Models

Author

Listed:
  • John R. Howell

    (Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802)

  • Sanghak Lee

    (Tippie College of Business, University of Iowa, Iowa City, Iowa 52242)

  • Greg M. Allenby

    (Fisher College of Business, Ohio State University, Columbus, Ohio 43210)

Abstract

Promotions are used in marketing to increase sales and drive profits by temporarily decreasing the price per unit of a good. Some price promotions apply to all quantities (20% off), some have limits on the number of units that can be purchased at a reduced price, and others only offer the discount if the volume purchased is sufficiently high. We develop a model of price promotions in the context of a direct utility model where its effects are incorporated through the budget constraint. Price promotions complicate the estimation and analysis of direct utility models because they induce kinks and points of discontinuity in the budget set. We propose a Bayesian approach to addressing these irregularities and demonstrate the ability of the direct utility model to be used in counterfactual analyses of price promotions. We investigate the stability of utility function estimates for consumers under alternative price promotions, and find that the majority of the effect of a price promotion is through the budget set, not through changes in the utility function. We also investigate the economic value of customized price promotions where the customization includes the value and format of the offer.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0948 .

Suggested Citation

  • John R. Howell & Sanghak Lee & Greg M. Allenby, 2016. "Price Promotions in Choice Models," Marketing Science, INFORMS, vol. 35(2), pages 319-334, March.
    • Handle: RePEc:inm:ormksc:v:35:y:2016:i:2:p:319-334
    DOI: 10.1287/mksc.2015.0948
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.2015.0948
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mksc.2015.0948?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Peter M. Guadagni & John D. C. Little, 1983. "A Logit Model of Brand Choice Calibrated on Scanner Data," Marketing Science, INFORMS, vol. 2(3), pages 203-238.
    2. Peter E. Rossi & Robert E. McCulloch & Greg M. Allenby, 1996. "The Value of Purchase History Data in Target Marketing," Marketing Science, INFORMS, vol. 15(4), pages 321-340.
    3. Raghuram Iyengar & Kamel Jedidi, 2012. "A Conjoint Model of Quantity Discounts," Marketing Science, INFORMS, vol. 31(2), pages 334-350, March.
    4. Robert C. Blattberg & Richard Briesch & Edward J. Fox, 1995. "How Promotions Work," Marketing Science, INFORMS, vol. 14(3_supplem), pages 122-132.
    5. Bhat, Chandra R., 2005. "A multiple discrete-continuous extreme value model: formulation and application to discretionary time-use decisions," Transportation Research Part B: Methodological, Elsevier, vol. 39(8), pages 679-707, September.
    6. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
    7. Nitin Mehta & Xinlei (Jack) Chen & Om Narasimhan, 2010. "Examining Demand Elasticities in Hanemann's Framework: A Theoretical and Empirical Analysis," Marketing Science, INFORMS, vol. 29(3), pages 422-437, 05-06.
    8. Daniel McFadden, 1986. "The Choice Theory Approach to Market Research," Marketing Science, INFORMS, vol. 5(4), pages 275-297.
    9. Sanghak Lee & Greg M. Allenby, 2014. "Modeling Indivisible Demand," Marketing Science, INFORMS, vol. 33(3), pages 364-381, May.
    10. Greg M. Allenby & Thomas S. Shively & Sha Yang & Mark J. Garratt, 2004. "A Choice Model for Packaged Goods: Dealing with Discrete Quantities and Quantity Discounts," Marketing Science, INFORMS, vol. 23(1), pages 95-108, June.
    11. Sanghak Lee & Jaehwan Kim & Greg M. Allenby, 2013. "A Direct Utility Model for Asymmetric Complements," Marketing Science, INFORMS, vol. 32(3), pages 454-470, May.
    12. Inman, J Jeffrey & McAlister, Leigh & Hoyer, Wayne D, 1990. "Promotion Signal: Proxy for a Price Cut?," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 17(1), pages 74-81, June.
    13. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, October.
    14. J. Miguel Villas-Boas & Russell S. Winer, 1999. "Endogeneity in Brand Choice Models," Management Science, INFORMS, vol. 45(10), pages 1324-1338, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adam N. Smith & Stephan Seiler & Ishant Aggarwal, 2023. "Optimal Price Targeting," Marketing Science, INFORMS, vol. 42(3), pages 476-499, May.
    2. Kim, Youngju & Hardt, Nino & Kim, Jaehwan & Allenby, Greg M., 2022. "Conjunctive screening in models of multiple discreteness," International Journal of Research in Marketing, Elsevier, vol. 39(4), pages 1209-1234.
    3. Jean-Pierre H. Dubé, 2018. "Microeconometric Models of Consumer Demand," NBER Working Papers 25215, National Bureau of Economic Research, Inc.
    4. Sanghak Lee & Sunghoon Kim & Sungho Park, 2022. "A sequential choice model for multiple discrete demand," Quantitative Marketing and Economics (QME), Springer, vol. 20(2), pages 141-178, June.
    5. Hung Tran & Tien Mai, 2023. "Network-based Representations and Dynamic Discrete Choice Models for Multiple Discrete Choice Analysis," Papers 2306.04606, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jean-Pierre H. Dubé, 2018. "Microeconometric Models of Consumer Demand," NBER Working Papers 25215, National Bureau of Economic Research, Inc.
    2. Kim, Chul & Smith, Adam N. & Kim, Jaehwan & Allenby, Greg M., 2023. "Outside good utility and substitution patterns in direct utility models," Journal of choice modelling, Elsevier, vol. 49(C).
    3. Richards, Timothy J. & Gómez, Miguel I. & Pofahl, Geoffrey, 2012. "A Multiple-discrete/Continuous Model of Price Promotion," Journal of Retailing, Elsevier, vol. 88(2), pages 206-225.
    4. Bhat, Chandra R. & Mondal, Aupal & Asmussen, Katherine E. & Bhat, Aarti C., 2020. "A multiple discrete extreme value choice model with grouped consumption data and unobserved budgets," Transportation Research Part B: Methodological, Elsevier, vol. 141(C), pages 196-222.
    5. Bonnet, Céline & Richards, Timothy J., 2016. "Models of Consumer Demand for Differentiated Products," TSE Working Papers 16-741, Toulouse School of Economics (TSE).
    6. Sanghak Lee & Greg M. Allenby, 2014. "Modeling Indivisible Demand," Marketing Science, INFORMS, vol. 33(3), pages 364-381, May.
    7. David R. Bell & Jeongwen Chiang & V. Padmanabhan, 1999. "The Decomposition of Promotional Response: An Empirical Generalization," Marketing Science, INFORMS, vol. 18(4), pages 504-526.
    8. Sang Yong Kim & Richard Staelin, 1999. "Manufacturer Allowances and Retailer Pass-Through Rates in a Competitive Environment," Marketing Science, INFORMS, vol. 18(1), pages 59-76.
    9. Bhat, Chandra R., 2008. "The multiple discrete-continuous extreme value (MDCEV) model: Role of utility function parameters, identification considerations, and model extensions," Transportation Research Part B: Methodological, Elsevier, vol. 42(3), pages 274-303, March.
    10. B. P. S. Murthi & Sumit Sarkar, 2003. "The Role of the Management Sciences in Research on Personalization," Management Science, INFORMS, vol. 49(10), pages 1344-1362, October.
    11. Jing Li & Edward C. Jaenicke & Tobenna D. Anekwe & Alessandro Bonanno, 2018. "Demand for ready‐to‐eat cereals with household‐level censored purchase data and nutrition label information: A distance metric approach," Agribusiness, John Wiley & Sons, Ltd., vol. 34(4), pages 687-713, October.
    12. Ludovic Stourm & Raghuram Iyengar & Eric T. Bradlow, 2020. "A Flexible Demand Model for Complements Using Household Production Theory," Marketing Science, INFORMS, vol. 39(4), pages 763-787, July.
    13. Dannewald, Till & Kreis, Henning & Silberhorn, Nadja, 2007. "Das hybride Wahlmodell und seine Anwendung im Marketing," SFB 649 Discussion Papers 2007-062, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    14. Bhat, Chandra R. & Castro, Marisol & Pinjari, Abdul Rawoof, 2015. "Allowing for complementarity and rich substitution patterns in multiple discrete–continuous models," Transportation Research Part B: Methodological, Elsevier, vol. 81(P1), pages 59-77.
    15. Lee, Sanghak & Kim, Hyowon & Kim, Jaehwan & Allenby, Greg M., 2018. "A choice model for mixed decision variables," Journal of choice modelling, Elsevier, vol. 28(C), pages 82-96.
    16. Greg M. Allenby & Thomas S. Shively & Sha Yang & Mark J. Garratt, 2004. "A Choice Model for Packaged Goods: Dealing with Discrete Quantities and Quantity Discounts," Marketing Science, INFORMS, vol. 23(1), pages 95-108, June.
    17. Jorge Silva-Risso & Irina Ionova, 2008. "—A Nested Logit Model of Product and Transaction-Type Choice for Planning Automakers' Pricing and Promotions," Marketing Science, INFORMS, vol. 27(4), pages 545-566, 07-08.
    18. Anna E. Tuchman & Harikesh S. Nair & Pedro M. Gardete, 2018. "Television ad-skipping, consumption complementarities and the consumer demand for advertising," Quantitative Marketing and Economics (QME), Springer, vol. 16(2), pages 111-174, June.
    19. Pradeep Chintagunta & Jean-Pierre Dubé & Khim Yong Goh, 2005. "Beyond the Endogeneity Bias: The Effect of Unmeasured Brand Characteristics on Household-Level Brand Choice Models," Management Science, INFORMS, vol. 51(5), pages 832-849, May.
    20. B. P. S. Murthi & Sumit Sarkar, 2003. "The Role of the Mangement Sciences in Research on Personalization," Review of Marketing Science Working Papers 2-2-1025, Berkeley Electronic Press.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:35:y:2016:i:2:p:319-334. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.