The category-demand effects of price promotions

Although price promotions have increased in both commercial use and quantit y of academic research over the last decade, most of the attention has been focused on their effects on brand choice and brand sales. By contrast, lit tle is known about the conditions under which price promotions expand short -run and long-run category demand, even though the benefits of category exp ansion can be substantial to manufacturers and retailers alike. This paper studies the category-demand effects of consumer price promotions across 560 consumer product categories over a 4-year period. The data desc ribe national sales in Dutch supermarkets and cover virtually the entire ma rketing mix, i.e., prices, promotions, advertising, distribution, and new-p roduct activity. We focus on the estimation of main effects (i.e., the dyna mic category expansive impact of price promotions) as well as the moderatin g effects of marketing intensity and competition (both conduct and structur e) on short- and long-run promotional effectiveness. The research design uses modern multivariate time-series analysis to disent angle short-run and long-run effects. First, we conduct a series of unit-ro ot tests to determine whether or not category demand is stationary or evolv ing over time. The results are incorporated in the specification of vector- autoregressive models with exogenous variables (VARX models). The impulse-r esponse functions derived from these VARX models provide estimates of the s hort- and long-term effects of price promotions on category demand. These e stimates, in turn, are used as dependent variables in a series of second-st age regressions that assess the explanatory power of marketing intensity an d competition. Several model validation tests support the robustness of the empirical findings. We present our results in the form of empirical generalizations on the main effects of price promotions on category demand in the short and the long r un and through statistical tests on how these effects change with marketing intensity and competition. The findings generate an overall picture of the power and limitations of consumer price promotions in expanding category d emand, as follows. Category demand is found to be predominantly stationary, either around a fi xed mean or a deterministic trend. Although the total net short-term effect s of price promotions are generally strong, with an average elasticity of 2 .21 and a more conservative median elasticity of 1.75, they rarely exhibit persistent effects. Instead, the effects dissipate over a time period lasti ng approximately 10 weeks on average, and their long-term impact is essenti ally zero. By contrast the successful introduction of new products into a c ategory is more frequently associated with a permanent category-demand incr ease. Several moderating effects on price-promotion effectiveness exist. More fre quent promotions increase their effectiveness, but only in the short run. T he use of nonprice advertising reduces the category-demand effects of price promotions, both in the short run and in the long run. Competitive structu re matters as well: The less oligopolistic the category, the smaller the sh ort-run effectiveness of price promotions. At the same time, we find that t he dominant form of competitive reaction, either in price promotion or in a dvertising, is no reaction. Short-run category-demand effectiveness of pric e promotions is lower in categories experiencing major new-product introduc tions. Finally, both the short- and long-run price promotion effectiveness is higher in perishable product categories. The paper discusses several managerial implications of these empirical find ings and suggests various avenues for future research. Overall, we conclude that the power of price promotions lies primarily in the preservation of t he status quo in the category.