‘Sticky’ Price Promotions
1. Introduction
There has been an extensive literature on price promotions and its causes. Yet, a fundamental insight known to both marketing scientists and practitioners has rarely been the focus of research. It is the fact that, in the case of repeated purchases, we frequently observe consumer inertia. Marketing scientists have called this behavior ‘state dependence’. It captures the idea that after a purchase of a specific good, that consumer is more likely to repeat the purchase of that same good after tastes and other market factors like price and advertising are taken into account.
Practitioners have also found similar effects in their activities. The term ‘promotion stickiness’ is often used in the manufacturing and retail sector: the fact that a promotion carries an effect on the market after its own duration has expired. Managers are aware of this effect. One manager from a major breakfast cereal company shared that price promotions were a fundamental way to keep market shares up while referring to the inertial effect. This was important despite the strength of the brand that this company has attained. In addition, a manager from a leading retailer in western United States commented that most price promotions available in a store were first proposed by manufacturers. Depending on the price negotiation process, retailers could decide to pass-through the deal or decide against it.
Marketing scientists have found a number of reasons why we should see these inertial consumption effects. Hauser and Wernerfelt (...) consider the possibility that consumers utilize ‘consideration sets’ in order to manage the set of potential options to choose from thus lowering processing costs. This ‘device’ generally yields a high ...