A Price Discrimination Model of Trade Promotions

Loading...
Thumbnail Image
Penn collection
Marketing Papers
Degree type
Discipline
Subject
channels of distribution
channel power
trade promotion
forward buying
Business
Marketing
Funder
Grant number
License
Copyright date
Distributor
Related resources
Author
Cui, Tony Haitao
Raju, Jagmohan S
Zhang, Z John
Contributor
Abstract

Critics have long faulted the wide-spread practice of trade promotions as wasteful. It has been estimated that this practice adds up to $100 billion worth of inventory to the distribution system. Yet, the practice continues. In this paper, we propose a price discrimination model of trade promotions. We show that in a distribution channel characterized by a dominant retailer, a manufacturer has incentives to price discriminate between the dominant retailer and smaller independents. While offering all retailers the same pricing policy, price discrimination can be implemented through trade promotions because they induce different inventory-ordering behaviors on the part of retailers. Differences in inventory holding costs have been shown to be an important determinant of consumer promotions. Our analysis suggests that differences in holding costs are also potentially an important driver for the use of trade promotions. The implications from our model explain a number of anecdotal and/or empirically observed puzzles about how trade promotions are practiced. For example, our analysis explains why chain stores welcome trade promotions but independents do not. Our analysis outlines implications for managing trade promotions.

Advisor
Date Range for Data Collection (Start Date)
Date Range for Data Collection (End Date)
Digital Object Identifier
Series name and number
Publication date
2008-09-01
Journal title
Marketing Science
Volume number
Issue number
Publisher
Publisher DOI
Journal Issue
Comments
Recommended citation
Collection