EFFECT OF BRAND LOYALTY ON ADVERTISING AND TRADE PROMOTIONS - A GAME-THEORETIC ANALYSIS WITH EMPIRICAL-EVIDENCE

In this payer we examine the issue of balancing media advertising (pul l strategy) and trade promotions (push strategy) for manufacturers of consumer packaged goods utilizing a three-stage game theoretic analysi s and test model's implications with scanner panel data. We develop a model of two competing manufacturers who dir;tribute their brand to co nsumers through a common retailer, In the model the manufacturers dire ctly advertise their brand to consumers and also provide trade deals t o the retailer. Each manufacturer's brand has a loyal segment of consu mers who buy their favorite brand unless the competing brand is offere d at a much lower price by the retailer. The number of loyal consumers is different for the two brands and so is the strength of their loyal ty to their favorite brand. The loyal consumers of the brand with stro nger loyalty require a larger price differential in favor of the rival brand before they will switch away from their favorite brand. The man ufacturers first decide advertising spending level, and then the whole sale price of their respective brands. The two manufacturers do not ob serve each other's decisions while making these decisions, however the y do take into account how the other firm is likely to react as a func tion of their own decisions, Advertising directly affects the strength of loyalty a consumer has for the favorite brand, If the favorite bra nd advertises, the loyalty strength increases but if the rival brand a dvertises, it decreases The marginal effect of own versus competing br and advertising is different in magnitude. The two manufacturers provi de trade deals to the retailer by discounting the brand from a regular wholesale price. The trade discounts are partially passed on to the c onsumers by the retailer who sets the retail prices of the two brands alter observing the wholesale prices. The retail shelf price discounts make the promoted brand more attractive to the consumers due to the r educed price differential between their favorite brand and the promote d brand, thus affecting their switching behavior. The model and its an alysis shed light on the role of brand loyalty in the optimal advertis ing and trade promotion polices for the two manufacturers. The analysi s indicates that, if one brand is sufficiently stronger than the other and if advertising is cost effective, :hen the stronger brand loyalty requires less advertising than weaker brand loyalty, but a larger loy al segment requires more advertising than a smaller loyal seg ment. Mo reover, stronger brand loyalty requires more trade promotion spending under these conditions. The analysis also indicates that the retailer promotes the stronger loyalty brand more often but provides a smaller price discount for it compared to the weaker loyalty brand. These anal ytical results can be understood better if we view advertising as a '' defensive'' strategy used to build brand loyalty which helps in retain ing the loyal consumers, and price promotions as an ''offensive'' stra tegy used to attract the loyal consumers away from the rival brand. Fo r example, the result that the stronger brand invests less in advertis ing than the weaker brand can be explained as follows. The stronger lo yalty brand does not find use of advertising attractive because it fac es little threat from the weaker brand due to its sufficiently stronge r loyalty. Instead it spends more on promotions (provided advertising is cost effective) to attract away the weaker brand's loyal consumers. The weaker brand, on the other hand, finds It optimal to defend its l oyal franchise by spending more on advertising, as promotions do not h elp much due to the difficulty in attracting away the stronger brand's loyal consumers. In this sense, the stronger brand plays ''offensive' ' by using more trade promotions, and the weaker brand plays ''defensi ve'' by emphasizing advertising.We also conduct an empirical analysis of the model's propositions using scanner panel data on seven frequent ly purchased nondurable product categories, In a sample of 38 national brands from the seven categories we find that weaker loyalty brands s pend more on advertising; brands with larger loyal segment spend more on advertising; and the retailer promotes stronger loyalty brands more often but provides a smaller price discount on average for them compa red to weaker loyalty brands. These findings are consistent with the m odel.