Article

DECOMPOSING PURCHASE ELASTICITY WITH A DYNAMIC STRUCTURA L MODEL OF FLEXIBLE CONSUMPTION

Journal of Marketing Research (Impact Factor: 2.52). 01/2008; 25:487-498.

ABSTRACT

In this article, the authors offer a methodology to decompose the effects of price promotions into brand switching, stockpiling, and change in consumption by explicitly allowing for consumer heterogeneity in brand preferences and consumption needs. They develop a dynamic structural model of a household that decides when, what, and how much to buy, as well as how much to consume, to maximize its expected utility over an infinite horizon. By making certain simplifying assumptions, the authors reduce the dimensionality of the problem. They estimate the proposed model using household purchase data in the canned tuna and paper towels categories. The results from the model offer insights into the decomposition of promotional effects into its components. This could help managers make inferences about which brand‟s sales are more responsive to stockpiling or increase in consumption expansion and how temporary price cuts affect future sales. Contrary to previous literature, the authors find that brand switching is not the dominant force for the increase in sales. They show that brand-loyal consumers respond to a price promotion mainly by stockpiling for future consumption, whereas brand switchers do not stockpile at all. The authors also find that heavy users stockpile more, whereas light users mainly increase consumption when there is a price promotion.

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    • "These are customers who would have bought the brand in the future anyway but decide to make the purchase now instead. Chan, Narasimhan, and Zhang (2004) and Neslin, Henderson, and Quelch (1985) find that loyal customers are more likely to accelerate than non-loyal customers. This is reinforced by Macé and Neslin's (2004) finding that high share brands have larger postpromotion dips. "

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    ABSTRACT: In this paper, we study the role of consumer price expectations in influencing consumer purchase decisions. Specifically, we examine the drivers of relative dominance of two price expectations—one formed prior to store visit (PRIOR) and the other about price in other stores (POST) formed after being exposed to focal store price. We collect the data from an online store shopping environment, allowing participants to make real purchase decisions. We have identified two distinct classes of shopping behaviors in our data—inside-focused (IF) and outside-looking (OL). Purchase decisions of the former are mainly driven by PRIOR while that of the latter by POST. At constant cost, we show that a promotion scheme with deep discounts (e.g., 5 % for 3 weeks or 15 % price cut in the first week) boosts sales more than the one with shallow discount (e.g., 3 % for 5 weeks). This increase comes mainly from the OL class, which is more sensitive to price changes. We further demonstrate how stores should manage consumer price expectations to maximize the sales lift during price promotions.
    Full-text · Article · Nov 2007
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