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promotion effects

Eijte W. Foekens *, Peter S.H. Leeflang , Dick R. Wittink

Department of Marketing and Marketing Research, Faculty of Economics, University of Groningen,

PO Box 800, 9700 AV Groningen, Netherlands

Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853-4201, USA

Abstract

The purpose of this paper is to examine the dynamic effects of sales promotions. We

create dynamic brand sales models (for weekly store-level scanner data) by relating store

intercepts and a brand’s own price elasticity to a measure of the cumulated previous price

discounts — amount and time — for that brand as well as for other brands. The brand’s

own non-price promotional response parameters are related to the time since the most

recent promotion for that brand as well as for other brands. We demonstrate that these

dynamic econometric models provide greater managerial relevance than static models

can. 1999 Elsevier Science S.A. All rights reserved.

1. Introduction

Sales promotions are widely used by manufacturers and retailers. There has

been an explosive growth in promotional expenditures in the USA and in many

West European countries during the last few decades. Promotional activities

such as temporary price discounts, feature advertising and displays of brands by

retailers tend to have immediate sales effects. A primary reason for such

promotions by retailers is the potential to increase store traffic. For example,

See, e.g. (Foekens (1995), Chapter 3) and Leeflang and Van Raaij (1995).

0304-4076/99/$ — see front matter 1999 Elsevier Science S.A. All rights reserved.

PII: S 0 3 0 4 - 4 0 7 6 ( 9 8 ) 0 0 0 6 3 - 3

250 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

some consumers may decide which store to go to for grocery shopping in a given

week based on the brands advertised (featured) in the retailers’ weekly advertise-

ments. Manufacturers also hope to achieve positive incremental sales for their

brands.

The growth in promotional expenditures, along with technological develop-

ments in data collection (e.g. UPC scanning equipment), has contributed to

recent progress in the modeling of promotion effects on brand sales. The model

outcomes have increased marketing researchers’ knowledge about the impact of

promotions. A frequent criticism of econometric models of promotional effects

estimated with store sales data is that it is virtually impossible for the manufac-

turer to decompose the effects into relevant components: e.g. brand switching,

store switching, stockpiling and (temporarily) increased consumption. The clas-

sic paper about this decomposition is based on household panel data (Gupta,

1988). Yet, brand managers depend largely on sales effects estimated from data

aggregated across households (Bucklin and Gupta, 1996). In this paper we

enhance the knowledge about so-called intermediate-term effects by incorporat-

ing past promotion activities in the parameters that represent current promo-

tion effects, using store sales data.

It seems reasonable to propose that a given sales effect for a brand is

managerially most desirable if it comes from increased consumption. Brand

switching may or may not be an attractive sales effect, depending upon competi-

tive reactions to the promotions (Raju, 1992; Leeflang and Wittink, 1996) and

their cross-brand effects. And the effect due to consumer stockpiling is ephemer-

al if higher sales now result in lower sales later. Yet, stockpiling effects have been

difficult to document with data aggregated across households (Neslin and

Schneider Stone, 1996). One possible reason for this difficulty is the inadequacy

of model specifications. Therefore, we propose to expand models of promotional

effects estimated with store data, in order to gain more insight into the dynamic

effects of promotions on sales. The specification of these effects is motivated by

previous research results.

We test hypotheses about the nature of dynamic promotion effects. We create

dynamic models of promotional activities by relating (store) intercepts and

price-promotion parameters to both the size of recent price discounts and the

time since the previous discount. The non-price promotion parameters are

related to the time since the previous (price or non-price) promotion. These

relationships are incorporated in a varying parameter model. The calibrated

models are extensions of the SCAN*PRO model (Wittink et al., 1988) which has

been used in some two-thousand different commercial applications in North

America, Europe, and Asia. We use store-level scanner data for three brands of

a frequently purchased consumer food product sold in a metropolitan area in

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 251

the USA. The data represent 52 weeks for each of 28 stores belonging to one

retail chain.

The paper is organized as follows. In Section 2 we discuss dynamic promotion

effects and briefly review the existing literature. The modified SCAN*PRO model is

described in Section 3, along with hypotheses. The estimation method is de-

scribed in Section 4. We present the varying parameter model estimates in

Section 5, and conclude with a discussion of the results. We also provide

implications for researchers and managers.

We summarize the characteristics and results of six studies that have focused

on the effects of the magnitude and frequency of price promotions in Table 1.

These studies suggest that

(a) stockpiling is a positive function of the magnitude of a temporary price

discount;

(b) variability in category sales is a positive function of the magnitude of

a temporary price discount (suggesting higher stockpiling and/or con-

sumption);

(c) variability in category sales is a negative function of the frequency of price

discounts (suggesting lower stockpiling and/or consumption);

(d) the price discount effect is a negative function of the relative frequency of

promotions;

(e) the optimal purchase quantity for the consumer is a positive function of the

discount magnitude and the amount of time between temporary discounts.

We use these findings to argue in favor of dynamic parameters as follows.

A model of promotions estimated from store sales data has parameters that

reflect a multitude of factors that can explain a sales effect: e.g. brand switching,

stockpiling and an increase in consumption. The roles that these factors play at

a given time vary as a function of the magnitude of a recent price promotion and

the recency of price- and non-price promotions. For example, the opportunity

for households to stockpile units of a discounted brand increases with the

amount of time since a previous promotion. This opportunity also decreases

with the magnitude of a previous price discount. If households stockpile, then

unit sales occurring after the promotion of a brand has ended will be reduced.

However, models of promotional effects on brand sales often fail to show

significant ‘post-promotion’ dips in sales. The difficulty in isolating such nega-

tive effects has been attributed to a variety of factors (Blattberg and Neslin, 1990;

Neslin and Schneider Stone, 1996). One possible explanation is that previous

attempts have focused primarily on the use of simple lagged promotion vari-

ables. We propose that the post-promotion dip be accommodated by allowing

Table 1 252

Studies of the magnitude and frequency of price promotions

Krishna (1991) Brand sales Empirical data from NA Brands with higher (perceived)

computer simulated discount frequency obtain a

shopping experiment smaller market share gain and

have a lower expected price

Krishna et al. (1991) Brand sales Consumer survey data Less stockup with smaller High discount frequency of

(in a supermarket) discounts (current effect) a preferred brand reduces

consumer response to discounts

on new brands or on less

preferred brands

Helsen and Schmittlein Category sales Simulated data Deeper expected discounts Consumers should stockpile

(1992) reduce current forward a promoted product more

buying intensively the lower the

incidence of discount

opportunities

Raju (1992) Category sales Scanner data (cross- Higher magnitude of Higher discount frequency leads

sectional) discount leads to greater to a lower variability in category

variability in category sales

sales (current effect)

Assunc7 a o and Meyer Category sales No empirical data. NA Effect of price on sales is

(1993) Outcome based on a decreasing function of the long-

normative relation run relative frequency of price

between purchasing discounts and the probability of

behavior and price consecutive price discounts

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

Krishna (1994) Category sales Empirical data from Optimal purchase quantity Average quantity purchased on

computer simulated for the consumer increases discount should be larger when

shopping experiment with deal amount (current discounts are spaced further

effect) apart

NA"Not applicable.

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 253

in the spirit of work by Gatignon and Hanssens (1987) who argue that such

dynamic models are more useful than models in which parameter variation is

purely stochastic or depends only on time

3. Model specification

(Wittink et al., 1988). This model was originally developed to quantify the effects

of promotions carried out by retailers for individual brands. To maintain the

confidentiality of the data sources the promotion parameters had to be equal

across stores. Store intercepts are included to accommodate heterogeneity in

a brand’s unit sales under non-promoted conditions. The SCAN*PRO model is

multiplicative so that promotion effects are proportionally homogeneous (pro-

portional to each store’s intercept).

Let J be the number of brands, ¹ the number of weekly observations per

store, N and the total number of sample stores. We use the following dynamic

specification (for all stores belonging to a given chain) for brand k:

P FGIR ( P FHI

s "j d GIR k"JGIR GHR k"JGHR exp(u ) (1)

GIR GIR IR PM JGIR PM JHI GIR

GIR J H$I GHR J

where

S " unit sales (e.g. pounds) of brand k in store, i week t;

GIR

P " actual unit price of brand k in store i, week t;

GIR

PM " regular (non-promoted) unit price of brand k in store i, week t;

GIR

D " an indicator variable for promotion: l if brand k is promoted by store

JGIR

i in week t, and 0 otherwise, where l"1 denotes ‘feature ad only’,

l"2: ‘display only’, and l"3: ‘simultaneous use of feature and

display’;

j " store intercept for brand k in store i, week t;

GIR

d " (seasonal) weekly multiplier for brand k, week t;

IR

h " own (temporary discount) price elasticity for brand k, in store i, week t;

GIR

k " own multiplier for brand k for promotion l, in store i, week t;

JGIR

h " cross (temporary discount) price elasticity for brand j with respect to

HI

brand k ;

k " cross multiplier of promotion l for brand j with respect to brand k;

JHI

u " a disturbance term for brand k in store i, week t, where u &N(0,p).

GIR GIR I

See, e.g. Parsons (1975).

254 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

If j "j , h "h , and k "k for all i,t, model (1) reduces to the static

GIR GI GIR I JGIR JI

SCAN*PRO model in which response parameters are assumed to be homogeneous

across stores and over time. Less constrained versions of the static model (e.g.

parameter heterogeneity across stores belonging to different chains) yield para-

meter estimates with high face validity and high forecast accuracy.

We emphasize that the price elasticities estimated with a model such as Eq. (1)

may not be comparable to a ‘standard’ price elasticity in microeconomics. There

are at least three reasons why the temporary price discount elasticity in Eq. (1)

may differ from a regular price elasticity:

(a) In many product categories regular price changes represent increases,

often due to inflation. The price elasticities in Eq. (1) are based on consumer

response to temporary price discounts.

(b) Changes in regular price often occur because of increases in raw material

costs and other factors in the production process. As a result, many brands

within a product category experience regular price increases at approximately

the same time. By contrast, temporary price discounts instituted by a retailer

often occur in response to a trade promotion allowance offered by the manufac-

turer of a brand. Even if manufacturers of competing brands offer allowances at

the same time, the retailer has no incentive to institute temporary price dis-

counts simultaneously for these brands.

(c) Perhaps most importantly, unlike regular price changes, temporary price

cuts induce consumers, depending upon the product, to temporarily stockpile

and/or temporarily increase consumption of the promoted item. This means

that temporary price discount elasticities should have higher (absolute) values

than regular price elasticities. And, if the opportunity to stockpile depends on

certain conditions (e.g. the recency of a previous promotion) it is inappropriate

to assume constant response parameters in Eq. (1).

One operational issue is the definition of the regular price. Within one year

a brand’s regular price in a store changes infrequently. Empirically, therefore,

the determination of this regular price is relatively straightforward: it is a

high value that occurs frequently for the brand in a given store, usually the

maximum value in such a data set of weekly observations. If there are two

different high values that both occur in consecutive weeks, we accommodate an

apparent change in the regular price. Hence, the regular price variable in Eq. (1)

has a time subscript.

We note that if the actual price equals the regular price, the price-index

variable in Eq. (1) takes the value 1. And in the absence of promotions for any of

Our procedure is similar to the one used by companies such as ACNielsen.

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 255

the brands, j represents unit sales of brand k in store i, week t, at the (unstated)

GIR

regular price.

Eq. (1) assumes that only within-store variation should be used for the

estimation of temporary price discount, feature advertising and display para-

meters. Differences in promotions between stores occur as a result of differences

in store-level competition and in consumer promotion sensitivities. Time-series

variation in promotions within each store is exogenous because retailers pass

manufacturer allowances for promotions through based on expected effects on

store traffic and product category volume. The timing of such allowances is

difficult to predict for competitive (between-brand) reasons. And retailers have

no incentive to promote more than one brand from the same product category

at the same time. A similar argument applies to the magnitude of a temporary

price discount for a given brand.

The dynamic model expressed in Eq. (1) allows only the own-brand parameters

to vary across stores and weeks. The cross-effect parameters are constant because:

(a) in static models the cross-brand effects are much weaker than the own-

brand effects;

(b) cross-brand effects are less likely to reflect consumer stockpiling (a pri-

mary reason for the creation of dynamic effects).

We now introduce parameter process functions for the own-brand price elastic-

ity, for the own-brand promotion multipliers and for the store intercepts. For

convenience, we drop the subscript k from these functions, Eqs. (2)—(4) below.

We let the own-price elasticity depend on (amount and time of) previous

temporary price discounts for own and competing brands, and show expected

signs (discussed under hypotheses below) in parentheses below the parameters:

h "b #b Dsum #b CDsum #l (2)

GR GR GR GR

\ > >

where

Dsum " S gQ\(PM !P ) for own brand in store i,

GR Q GR\Q GR\Q

CDsum " ( S gQ\( PM !P ) for the competing brands in

GR H$I Q GHR\Q GHR\Q

store i,

g"a decline rate (0(g)1), to allow the effect of a previous discount

to depend on its recency,

u"number of weeks of history used for the computation of the

explanatory variables in Eqs. (2)—(4); the scalar is introduced to

limit the number of weeks of history,

l "a random disturbance term, where l &N(0,p );

GR GR J

b , b , b , g are unknown parameters.

256 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

In Eq. (2), own- and other-brand effects are separated. One reason is that

the own-price elasticity reflects the purchase behavior of ‘loyal’ consumers of the

brand. The stockpiling behavior of these loyal consumers depends on the

magnitude and timing of recent price promotions for the brand. The elasticity

also reflects the (temporary) switching from other brands that occurs in the

presence of temporary price cuts. If this price cut is sufficiently large, the

purchases by consumers who would otherwise buy another brand may also

accommodate some stockpiling. However, even though CDsum captures the

aggregation of price cuts for all other brands (for simplicity), we expect that

b (b .

We use a grid search procedure for the determination of g. If g"1, discounts

in the preceding u weeks are equally weighted.

The own-brand promotional multipliers in Eq. (1) reflect the effects of indi-

cator variables D on s . The variables allow feature and display activities to

JGIR GIR

affect unit sales of brand k in store i, week t. We allow the magnitudes of these

multipliers to depend on not only the time since the previous feature and/or

display activity but also on the time since the previous price promotion. The

arguments for separating the own- and other-brand effects in Eq. (3) are similar

to the reasons discussed for Eq. (2).

k "c ¹ime AJ C¹ime AJ exp(l ) (3)

JGR J GR GR JGR

> > >

where

¹ime "equals r if r )u, and u#1 otherwise, where r is the number of

GR

weeks since the previous own-brand promotion in store i;

C¹ime "equals r if r )u, and u#1 otherwise, where r is the number of

GR A

weeks since the previous promotion of any competing brand in

store i;

l "a random disturbance term, where l &N(0,p ), l"1,2,3;

JGR JGR TJ

c ,c ,c are unknown parameters.

J J J

3.3. Store-intercept process function

The store intercepts j in Eq. (1) reflect unit sales of brand k in store i in the

GIR

absence of price and non-price promotions for all brands in the product

category. One could argue that the store intercept represents the unit sales of

brand k in store i by consumers who prefer k over other brands under non-

promoted conditions. If these consumers stockpile any of the brands in the

presence of promotions, then in periods following promotions, the intercept

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 257

should decrease. Therefore, the process function allows the intercept to depend

on the magnitude of the previous temporary price discounts and the time since

the last promotion both for own and other brands. One advantage of this

formulation is that the post-promotion dip, which has been difficult to find in

traditional models of sales, should be easier to manifest itself.

We use the following process function for the store intercepts:

GR G GR GR GR GR GR

> \ \ > >

(4)

where

GR

number of weeks since the previous non-price own-brand

promotion in store i;

CNP¹ime "equals q if q )u, and u#1 otherwise, where q is the

GIR

number of weeks since the previous non-price other-brand

promotion in store i;

e "a random disturbance term, where e &N(0,p);

GR GR C

and all other explanatory variables are as defined before; a are unknown

G

store-specific constants (i"1,2,N) and a ,2,a are unknown parameters. In

Eq. (4) a distinction is made between the effects of previous price and non-price

promotions. All arguments for this specification are analogous to those made for

Eqs. (2) and (3).

3.4. Hypotheses

The own-brand price parameter should be negative and the cross-brand price

parameters positive, based on standard economic theory. Extant research indi-

cates that higher discounts lead to higher purchase acceleration (Table 1), which

draws sales from the weeks following the promotion, unless consumption

increases correspondingly. Similarly, quantity acceleration leads to stockpiling

by consumers who buy at the normal time but purchase partly for future

consumption (Blattberg and Neslin, 1990, p. 192). Thus, we hypothesize that the

own-brand price elasticity will move toward zero, the larger the magnitudes of

previous price promotions for own brand (Dsum) and for other brands (CDsum).

This hypothesis, as well as the ones stated below, assumes that other parameters

are held constant.

The own-brand multipliers should be greater than one and the cross-brand

multipliers less than one. The greater the number of weeks since the most recent

See Neslin and Schneider Stone (1996) and Van Heerde et al. (1997).

258 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

price or non-price promotion, the larger the own-brand multipliers are expected

to be. Also, we expect that the closer the cross-brand multipliers are to one, the

closer c in Eq. (3) is to zero.

J

The intercept value should be positive for each store. The unit volume for

brand k under non-promoted conditions (for all brands) represents purchases

for current and future consumption. Purchases for future consumption (beyond

the next regular shopping trip) should be rare in the absence of promotions.

However, the incidence of such purchases should increase with larger temporary

price discounts. Thus, the greater the magnitude of previous price promotions,

the smaller the current period’s intercept. Similarly, the shorter the time period

since the previous non-price promotion, the smaller the current intercept.

For the intercept process function we may also argue that the greater the part

of a brand’s unit volume accounted for by loyal consumers under non-promoted

conditions, the less the relevance of other-brand promotions. If the intercept

represents loyal consumers’ purchases only, we expect a "a "0. Similarly,

the smaller the cross-brand price elasticities, the closer b in Eq. (2) is to zero.

We note that the interpretation of the price elasticities and multipliers chan-

ges as the intercept changes. In the absence of changes in marketing instrument

parameters, a decrease in an intercept implies decreases in the absolute market-

ing effects (since the impact would be defined with regard to a smaller base). As

a result, the dynamic effects for the marketing instruments captured by the

process functions (2) and (3) are difficult to interpret if the intercept dynamics are

not taken into account. Depending on the extent to which variation in other

parameters occurs simultaneously, it is conceivable that signs in one or more

process functions are reversed from our expectations. The plausibility of the

empirical results will, therefore, have to be judged by the change in predicted

unit sales given specific changes in promotional conditions.

4. Estimation

By substituting Eqs. (2)—(4) in Eq. (1), we obtain a dynamic model that allows

for parameter heterogeneity across stores and over time. The model is estimated

by a generalized least squares procedure in the usual two-step way (see Judge

et al., 1985, pp. 798, 799). We assume that: (i) the error terms of the different

parameter process functions are uncorrelated; and (ii) there is no autocorrela-

tion in any error term.

There may be concern about the consistency of the store-intercept estimates

in a non-linear fixed-effects model. This issue is resolved if ¹ is increased while

the number of parameters is held constant. This would be feasible if the

Details on the estimation can be obtained from the first author upon request.

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 259

weekly dummies capture seasonality that is the same in successive years, i.e.

d "d . Another solution is to let the constant part in the store-intercept

IR> IR

process function, a , vary between stores based on a measure of store size.

GI

A third solution may be found in the specification of a random-effects model.

Otherwise, this issue may require consideration of several complicating issues

such as the properties of the estimated error variance—covariance matrix and the

use of GLS estimators.

5. Empirical analysis

consumer food product sold in a metropolitan area in the USA. The data

represent 52 weeks for each of 28 stores belonging to one retail chain. Tempor-

ary price cuts, displays and features are frequently used consumer promotions in

this product category. Manufacturer television advertising and couponing are

also used, but no data are available on these activities. The weekly indicator

variables in (1) serve in part as proxies for these missing variables (there is little

seasonality in purchases from the product category).

For the measurement of the explanatory variables in the process functions, we

use six weeks of history (u"6) on the previous promotional activities. Because

of the initialization of these variables we have 46 ("52!6) weekly store

observations for estimation.

Brand A is the most heavily promoted brand: it receives more promotions

than brands B and C together. Price discounts account for more than half of all

promotional activities for A. Brand B is the least promoted brand. Table 2 shows

the means and standard deviations of the magnitude and timing variables of the

parameter process functions. The large frequency of price discounts for A results

in relatively large mean values for Dsum for A (and CDsum for B and C). Brand

B has the lowest mean value for Dsum (on average a six-week cumulated

discount of $0.23), and the highest for CDsum ($1.14). Table 2 also shows that

A has a temporary price cut on average every 1.7 weeks (P¹ime). In addition,

some type of non-price promotion for A tends to occur every 1.5 weeks

(NP¹ime). The large standard deviations (relative to the means) suggest that

variation in the time between promotions for the brands is quite large.

5.2. Results

The optimal grid solutions for g for brands A, B and C are 0.67, 0.75 and 0.95

respectively. Thus, the full models (m1 below; see Table 3) with g(1 have a fit

260 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

Table 2

Means and standard deviations of the promotional intensity variables (u"6)

Magnitude variables

Dsum CDsum

A B C A B C

Std.dev. 0.47 0.32 0.42 0.65 0.76 0.67

¹iming variables

P¹ime CP¹ime ¹ime C¹ime

A B C A B C A B C A B C

Mean 1.7 3.1 2.0 1.8 1.4 1.5 1.5 2.9 1.9 1.7 1.3 1.4

Std.dev. 2.8 3.3 2.6 2.6 2.9 2.9 2.9 3.1 2.6 2.6 3.3 3.1

NP¹ime CNP¹ime

A B C A B C

Std.dev. 2.8 3.1 2.6 2.7 3.3 3.2

Table 3

Parameter restrictions for the alternative nested models

Varying store intercept Stable store intercept (a "a "a "a "0)

Model m1 Model m4

Varying price elasticities and multipliers Varying price elasticities and multipliers

Model m2a Model m2b Model m5a Model m5b

Varying price Stable price elasticities Varying price Stable price elasticities

elasticities stable varying multipliers elasticities stable varying multipliers

multipliers multipliers

c "c "0 b "b "0 c "c "0 b "b "0

J J J J

Model m3 Model m6 ("static SCAN*PRO)

Stable price elasticities and multipliers Stable price elasticities and multipliers

c "c "0 c "c "0

J J J J

b "b "0 b "b "0

that is better than the fit of the corresponding models with g"1, implying that

more recent price promotions have stronger effects.

For each brand we examine the incremental explanatory power of each of

the process functions using F-tests (see Table 3). Model m4, the stable store

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 261

intercept model with varying price elasticities and multipliers, is nested in the

full model m1 as are models m2a and m2b. Model m3 is nested in both m2a and

m2b, etc.We find that the best models for brands A, B and C are m2b, m5a and m3

respectively. The estimation results for these models, for the full models (m1)

and for the static models (m6) are shown in Table 4. For brand A two of the

process functions have significant explanatory power. Only the price parameter

can be assumed to be constant. By contrast, for brand B only the own-price

elasticity is dynamic, while for brand C only the process function for the store

intercept matters.

For the intercept of brand A, previous own-brand discounts matter while

other-brand discounts do not, consistent with our expectation. On the other

hand, the timing of previous non-price promotions by other brands do and by

own brand do not matter. For brand C, the timing effects of previous own- and

other-brand non-price promotions are about the same.

The price elasticity of brand B appears to be especially dependent on own-

brand previous discounts. This result also appears to be consistent with our

expectation. The other-brand discounts also have a significant effect on the price

elasticity, albeit with an unexpected sign (which may not be wrong if Dsum and

CDsum are related).

The multiplier dynamics for brand A show stronger effects for previous

promotions by other brands than for own brand (the latter having an unex-

pected sign). Clearly, this result is inconsistent with our expectation.

In general, it appears that both own- and other brands’ previous promotions

are sources of parameter dynamics. This suggests that brand loyalty is modest in

this product category. Importantly, for two brands we obtain intercept dynam-

ics that accommodate post-promotion sales dips.

5.3. Implications

and static models, we show in Table 5 the range of estimated values of the

multipliers and the store intercepts (for three stores) for brand A, based on model

m2b. There is substantial variability over time in the store intercepts, and over

time and across stores in these multipliers. Two of the ranges of estimated own

feature- and own feature-and-display multipliers include seemingly implausible

values (i.e.(1), although in one case this results from a non-significant para-

meter estimate. We reemphasize the point that the process functions produce

parameter variation with some dependencies that may be responsible for values

that are implausible in the static model.

Table 4

Estimation results

Estimation method OLS GLS GLS OLS GLS GLS OLS GLS GLS

Deal decline rate 0.67 0.67 0.75 0.75 0.95 0.95

Degrees of freedom 1206 1194 1196 1206 1194 1204 1206 1194 1202

R log-sales space 0.926 0.930 0.930 0.777 0.782 0.781 0.890 0.893 0.892

Predictor variables

Static part Price PI—A ⴚ2.96 ⴚ3.19 ⴚ3.15 0.26 0.27 0.27 0.54 0.48 0.46

PI—B 0.69 0.36 0.36 ⴚ2.42 ⴚ1.82 ⴚ1.98 1.34 1.32 1.20

PI—C 1.08 0.75 0.75 0.38 0.36 0.42 ⴚ3.21 ⴚ3.77 ⴚ3.42

Non-price promotions F—A 1.17 0.51 0.51 1.48 1.63 1.38 0.63 0.43 0.44

D—A 1.80 1.96 1.95 0.94 0.95 0.95 0.82 0.82 0.81

FD—A 1.75 0.81 0.82 1.34 1.49 1.28 0.54 0.37 0.38

F—B 0.38 0.20 0.21 1.39 1.10 0.89 0.72 0.48 0.51

D—B 0.91 0.78 0.78 1.54 1.75 1.54 0.96 0.97 0.95

FD—B 0.33 0.17 0.17 2.08 1.86 1.34 0.61 0.42 0.43

F—C 0.93 0.53 0.54 1.42 1.73 1.35 2.12 2.01 1.70

D—C 1.03 1.01 1.01 0.93 0.93 0.93 2.41 2.37 2.39

FD—C 0.93 0.53 0.54 1.26 1.54 1.22 3.22 2.00 2.58

Dynamic part Prince-parameter Dsum 0.02 2.86 2.14 0.96

process function

CDsum 0.08 ⴚ1.44 ⴚ1.22 !0.23

Multiplier process Time;F—own !0.03 !0.03 !0.02 !0.18

function

Time;D—own ⴚ0.22 ⴚ0.22 !0.18 0.01

Time;F D—own !0.02 !0.02 !0.17 0.09

CTime;F—own 0.40 0.40 !0.20 !0.68

CTime;D—own !0.04 !0.04 !0.11 0.03

CTime;FD—own 0.20 0.20 0.03 0.62

Store-intercept Dsum ⴚ0.52 ⴚ0.53 0.17 0.04 !0.05

process function

CDsum !0.17 !0.19 0.02 0.10 0.09

NPtime !0.02 !0.02 !0.5 0.15 0.15

CNtime 0.08 0.08 0.08 0.17 0.17

Bold figures are significant parameter estimates; underlined figures are significant estimates with unexpected sign.

PI—A"price-index for brand A; F—A"feature only brand A; D—A"display only brand A; FD—A"feature and display brand A; etc.

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 263

Table 5

Variability in promotional effects (models for brand A)

Elasticities

Own price A !2.96 !3.15

Cross price B 0.69 0.36

Cross price C 1.08 0.75

Multipliers

Own feature A 1.17 (0.49, 1.11)

Own display A 1.80 (1.17, 1.95)

Own feature and display A 1.76 (0.78, 1.20)

Cross feature B 0.38 0.21

Cross display B 0.91 0.78

Cross feature and display B 0.33 0.17

Cross feature C 0.93 0.54

Cross display C 1.03 1.01

Cross feature and display C 0.93 0.54

Store intercepts

Store 1 164 (96, 189)

Smallest store 57 (32, 72)

Largest store 791 (669, 805)

Figures are based on significant parameter estimates; for the dynamic model, parameter estimates

are claimed to be significant if the corresponding parameter process function intercept estimate is

significant.

For each of the three stores considered (store 1, smallest store, and largest

store), the static model store intercept estimates lie between the corresponding

lower and upper values of the dynamic model. Fig. 1 shows the fluctuations in

the store 1 intercept for brand A over time. These fluctuations stem from brand

A’s own previous price discounts and the recency of other-brand non-price

promotions. The dotted line represents the fixed effect of the static model. On

average, the store 1 intercept in the dynamic model is lower than the fixed effect.

The dynamic promotion effects also lead to changes in the estimated net

incremental sales due to promotions relative to the static model. We consider

one promotional scenario scheduled during weeks 7—17 under two alternative

histories for weeks 1—6. We show the predicted sales in store 1 for both the

dynamic (m2b) and the static (m6) versions of the model for brand A in Fig. 2.

In case 1 with no promotion in weeks 1—6, predicted unit sales in week 7 with

the static model equals 164 units. The subsequent predicted values (265 in both

weeks 9 and 11) show net incremental sales (NIS) for a total of 202 units. The

264 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

Fig. 1. Graph of store 1 intercept for brand A (with a decline rate g"0.67)

dynamic model has a higher baseline in week 7 (196 units) and a smaller NIS

value of 184 units, or 91% of the estimated incremental sales from the static

model.

The difference between static and dynamic model predictions is more dra-

matic when the price discounts in weeks 9 and 11 occur after a substantial

amount of promotional activity in weeks 1—6 (case 2). Now the dynamic model

predicts net incremental sales of only 57 units. Thus, in this case of recently

occurring previous promotions, the net incremental sales estimated from the

dynamic model is only 28% of the static model estimate. We conclude that the

dynamic model can produce intuitively reasonable and strongly different con-

clusions about incremental sales achievable from promotions.

6. Discussion

a varying parameter model. The magnitude and/or timing of past promotions

are allowed to affect the parameters representing current promotion effects and

store intercepts. For one of three brands we find that the magnitudes and timing

Baseline sales are the sales that would occur had no brand offered any promotion.

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 265

Fig. 2. Brand A’s predicted sales in weeks 7—17 for store 1 for one promotional scenario under two

alternative histories.

a second brand the effects of the time since the previous (price or non-price)

promotion on the multipliers (representing feature and display effects on sales)

are significant. For two of the brands the estimated store intercepts vary

significantly over time. Importantly, by allowing the store intercepts to vary

based on the magnitudes of past temporary price discounts and the time since

266 E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268

dips in sales. We find that the fluctuations in the parameter estimates are quite

large.

Because the recency of promotions and the magnitude of the price discount

have significant effects on parameter values, the timing and the size of the

discount at the store level will be important determinants of promotion deci-

sions to maximize profit. The dynamic model results offer more valid insight

into the net incremental sales from promotions than static models do, if stockpil-

ing by consumers is the primary reason for the existence of dynamic effects.

The response model we developed in this paper could be extended to address

optimization questions such as: ‘how often should a manufacturer schedule

a promotion?’ and ‘how deep should the discount be?’ (see also Tellis and

Zufryden, 1995). The response model also can be used to provide conditional

forecasts.

We have several other suggestions for future research. First, the model

outcomes will improve if we restrict the parameters in the dynamic models to

a meaningful range of values and apply constrained estimation methods. The

constraints will have to take into account the dependencies across the process

functions. Also, model extensions such as the inclusion of additional variables

(e.g. manufacturer advertising and couponing) are worth examining. In addition,

it is meaningful to incorporate retailers’ decision-making in the model. This

implies, e.g. that trade promotion offers be incorporated and the ‘pass-through’

of these promotions to the consumer (Neslin et al., 1995) be modeled. Especially

if the power of retail organizations increases over time, the decision-making

process of the retailer should be considered explicitly (Wensley, 1994).

Another issue that deserves more attention is the assumption that promotions

are exogenous. The static model is specified with separate store intercepts so

that parameter estimates are based on time-series variation. One reason is that

variation in promotional activities across stores results partly from variation in

consumer and competitor (other retailers) characteristics. Thus a model that

uses cross-sectional variation would have to account for such dependencies. For

time-series variation, the major question is whether the timing of promotional

activities is random. For product categories with little or no seasonality, includ-

ing the one used here, it seems reasonable to assume that promotions are

exogenous. If, however, this assumption is non-realistic, the model specification

and its calibration have to be adapted correspondingly.

Finally, it will also be useful to assess the generalizability of varying para-

meter model results. It is especially important that models account for stockpil-

ing, because goods that are easy to stock-up have greater price-promotion

elasticities than other goods (Litvack et al., 1985). A comparison of varying

parameter model results across product categories that differ in stockpiling

potential offers opportunities to test whether differences in the values of these

elasticities in static models are indeed due to this explanation.

E.W. Foekens et al. / Journal of Econometrics 89 (1999) 249–268 267

Acknowledgements

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