Managing Price Promotions Within a Product Line

In this paper, I investigate the question of how a firm producing substitutes should coordinate price promotions of these products. I model price competition between two firms, each producing two products that are horizontally differentiated with respect to some characteristic. Consumers are divided into loyals, who always purchase their preferred product, and switchers, who have heterogeneous preferences for the four products. If consumers substitute easily between the products produced by one firm, the firms promote one product at a time to avoid cannibalization. If consumers mainly substitute between the products with the same characteristic, the firms often employ joint promotions with at least one product at a deep discount. If, at the same time, consumers easily substitute to the products in other categories, the firms use joint promotions less often and avoid simultaneous deep discounts.