Price expectations and optimal sales promotion policies

Chi Kin Yim, Purdue University

Abstract

The process of how people's beliefs or expectations affect their behavior have been widely studied in the economic literature. Recently, the importance of price expectations in customers' purchase decisions has received increasing attention in marketing. In this dissertation, we address various issues related to price expectations, such as: how are price expectations formed? How do price expectations affect customers' purchase decisions? And, what are the effects of customers' price expectations on a firm's pricing and sales promotion strategies? Our work on price expectations is being carried out in two studies. The first study is an empirical analysis of scanner-panel data wherein, we use a two-stage modeling procedure to study customers' price expectations. The first stage concerns the determination of brands' expected prices. In the second stage, brand choice is assumed to depend on a brand's retail price and the deviations of the brand's retail price from its expected price. The results reveal that the proposed price expectations model of brand choice provides a significantly better fit than a traditional pricing model. We also find that a brand's expected price is not only dependent on its past retail prices but, is also affected by the frequency with which the brand is promoted, economic conditions, customer characteristic and the type of store shopped. The second study uses an interactive computer-controlled experiment to obtain direct measures of the brand's expected prices and the uncertainties associated with them. This study aims to: (i) investigate the dynamic effects of sales promotions on brands' expected prices and the uncertainties associated with these expected prices, and (ii) hypothesize and test a price expectations model of the brand choice process. The effect of transaction utility on customers' brand choices is found to be significant and this effect may depend on the frequency with which a brand is promoted. The nonlinear impact of sales promotions on customers' price expectations found in this study also provides insights into the selection of optimal sales promotion schedules. Finally, we employ the results reported in the experimental study regarding the impact of sales promotions on customers' price expectations and brand choice to evaluate through a simulation study the effectiveness of alternate sales promotion schedules under different cost conditions, competitive considerations, and different assumptions about the distributions of customers' brand preferences.

Degree

Ph.D.

Advisors

Kalwani, Purdue University.

Subject Area

Marketing

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