A theory of retailer price promotion using economic foundations: It's all incremental

Kurt Alan Jetta, Fordham University


This dissertation offers a theory of retailer price promotions*. The theory is based on a desire to understand theoretically the tens of thousands of in-market observations that I have seen empirically over 20 years in the Consumer Packaged Goods Industry. Specifically, the theory states that incremental retail sales generated by reduced price promotions from retailers exhibits a Complete Category Expansion Effect (CCEE). That is, sales are entirely incremental to the retailer and the promoting manufacturer: there is no post-period reduction in sales ("dip") either in the short or long-term, nor is there a reduction in sales from competing brands, nor is there a reduction of sales for the promoted item in competing retailers. To develop this theory, the research will be divided into several sections. First (Section IV), there will be a discussion of why aggregated point-of-sale data at the chain level is an easier, cheaper and more extendable method of analyzing retailer promotions. Section V uses aggregated data to develop a more accurate and robust baseline model (sales in the absence of price promotion) using Dynamic Linear Models. This new model will be tested against the industry standard model on three measures of performance. We shall use this dynamic modeling technique to measure post-period sales effects. Section VI tests the model with over one thousand empirical examples. The examples will demonstrate the presence of the in-market effect of retailer price promotions with significant and sustained price discounts and no detectable reduction in post-period baseline sales. Section VII will explain why these empirical findings, as well as the theory, are consistent with the foundations of consumer demand theory. It will also provide insight on optimum profit conditions using the theory of hysteresis (Dixit - 1992) and demonstrate why not all sectors of the consumer economy can take advantage of the Theory of Retailer Price Promotion (TRPP). Finally, Section VIII will discuss the managerial and academic implications of these findings along with suggestions for future research. *Retailer Price Promotion is defined as a temporary price reduction at a retailer for fixed amount of time. It is accompanied by some form of communication about the reduced price, usually through Feature Advertising, In-Store Signage. In this paper "Promotion," "Price Promotion," and "Retail Price Promotion" will be used synonymously, unless otherwise noted.

Subject Area

Economic theory

Recommended Citation

Jetta, Kurt Alan, "A theory of retailer price promotion using economic foundations: It's all incremental" (2008). ETD Collection for Fordham University. AAI3314562.