An Empirical Test of the Theory of Sales: Do Household Storage Constraints Affect Consumer and Store Behavior?
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housing constraints
price promotion
retail prices
storage
Advertising and Promotion Management
Behavioral Economics
Business
Business Administration, Management, and Operations
Business Analytics
Business Intelligence
Management Information Systems
Management Sciences and Quantitative Methods
Marketing
Operations and Supply Chain Management
Organizational Behavior and Theory
Sales and Merchandising
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Abstract
We revisit and test Salop and Stiglitz (1982) Theory of Sales. Equilibrium comparative static predictions are that greater consumer storage constraints lead to: (1) higher average prices, (2) fewer promotions, and (3) shallower promotions. In equilibrium, price dispersion is nonlinear in storage constraints, first increasing then decreasing. Empirical estimates of storage constraints are developed for approximately 1,000 households using the American Housing Survey (1989), United States Census (1990), and Stanford Market Basket Database (1991–1993). We find consumers with greater storage constraints shop more often and purchase smaller quantities per visit; moreover, the comparative static predictions are supported and evidence consistent with the equilibrium dispersion prediction is observed. Estimated quantitative effects are economically important.