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Do Promotions Benefit Manufacturers, Retailers, or Both?

A. Gary Anderson Graduate School of Management, University of California, Riverside, California 92521-0203.
Tuck School of Business, Dartmouth College, Hanover, New Hampshire 03755.
The Anderson Graduate School of Management, University of California, Los Angeles, California 90095-1481.
Catholic University of Leuven, Naamsestraat 69, 3000 Leuven, Belgium, and Department of Marketing Management, Erasmus University Rotterdam, The Netherlands.
shuba.srinivasan{at}ucr.edu
koen.h.pauwels{at}dartmouth.edu
dominique.hanssens{at}anderson.ucla.edu
marnik.dekimpe{at}econ.kuleuven.ac.be

Do price promotions generate additional revenue and for whom? Which brand, category, and market conditions influence promotional benefits and their allocation across manufacturers and retailers? To answer these questions, we conduct a large-scale econometric investigation of the effects of price promotions on manufacturer revenues, retailer revenues, and total profits (margins).

A first major finding is that a price promotion typically does not have permanent monetary effects for either party. Second, price promotions have a predominantly positive impact on manufacturer revenues, but their effects on retailer revenues are mixed. Moreover, retailer category margins are typically reduced by price promotions. Even when accounting for cross-category and store-traffic effects, we still find evidence that price promotions are typically not beneficial to the retailer. Third, our results indicate that manufacturer revenue elasticities are higher for promotions of small-share brands, for frequently promoted brands and for national brands in impulse product categories with a low degree of brand proliferation and low private-label shares. Retailer revenue elasticities are higher for brands with frequent and shallow promotions, for impulse products, and in categories with a low degree of brand proliferation. Finally, retailer margin elasticities are higher for promotions of small-share brands and for brands with infrequent and shallow promotions. We discuss the managerial implications of our results for both manufacturers and retailers.

Key Words: long-term profitability; sales promotions; category management; manufacturers versus retailers; empirical generalizations; vector autoregressive models
History: Received: May 1, 2002;

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