Try It, You Will Like It: Does Consumer Learning Lead to Competitive Price Promotions?

There is strong evidence that consumers learn from their brand consumption experiences and continuously update their brand purchase probabilities. However, in explaining why established competitive brands continuously compete through periodic price promotions, most of the existing theories do not attribute this phenomenon to underlying consumer learning. Yet, "try it, you will like it" is often the stated rationale of the practicing marketing manager in offering consumers a price promotion on a brand. This paper examines the connection between consumer learning and the offering of price promotions. The consumer model specified is Markovian in nature and encompasses in addition to consumer learning other empirical findings such as the increase in product class consumption in response to price reductions. The consumer models used in the existing game theoretic approaches to this problem are shown to be mostly special cases of the proposed model. It is demonstrated that for the commonly used price response functions the existence of consumer learning, at a level of intensity consistent with that identified in empirical works, makes it optimal for competing brands to periodically offer price promotions. Moreover, it is shown that the competing brands should promote in different periods as opposed to head to head.