A price discrimination model of trade promotions

Tony Haitao Cui, Jagmohan S. Raju, Z. John Zhang

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

Abstract

Critics have long faulted the wide-spread practice of trade promotions as wasteful. It has been estimated that this practice adds up to $100 billion worth of inventory to the distribution system. Yet, the practice continues. In this paper, we propose a price discrimination model of trade promotions. We show that in a distribution channel characterized by a dominant retailer, a manufacturer has incentives to price discriminate between the dominant retailer and smaller independents. While offering all retailers the same pricing policy, price discrimination can be implemented through trade promotions because they induce different inventoryordering behaviors on the part of retailers. Differences in inventory holding costs have been shown to be an important determinant of consumer promotions. Our analysis suggests that differences in holding costs are also potentially an important driver for the use of trade promotions. The implications from our model explain a number of anecdotal and/or empirically observed puzzles about how trade promotions are practiced. For example, our analysis explains why chain stores welcome trade promotions but independents do not. Our analysis outlines implications for managing trade promotions.

Original languageEnglish (US)
Pages (from-to)779-795
Number of pages17
JournalMarketing Science
Volume27
Issue number5
DOIs
StatePublished - Sep 2008

Keywords

  • Channel power
  • Channels of distribution
  • Forward buying
  • Trade promotion

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