An investigation of the impact of promotions on across-submarket competition

Abstract

There is a recent trend among manufacturers of consumer packaged goods such as Proctor & Gamble to eliminate sales promotions and replace them with everyday low prices on their products. The objective of this study is to investigate whether and how such a significant change in promotional strategy would affect the competitive patterns in a market. Specifically, what would be the impact of such a move on competition between different brands in a market? Would the competitive structure change significantly as a result? How would this affect specific brands? We propose a methodology based on a dogit model of brand switching to evaluate and test the impact of promotions on competitive structure and to identify the nature of the impact. Our findings reveal that some sales promotions (e.g., displays and price cuts) have a significant impact in shaping competitive patterns characterizing submarkets for crackers. The magnitude of this impact decreases with increased product differentiation and increased intensity of the promotional activities in the market. Our findings help managers determine how the elimination of certain sales promotions may reshape competitive patterns before making such a move. The knowledge of which submarket boundaries are stable and which boundaries can be affected by promotions also helps managers decide which product alternatives to promote (or not to promote) so as to maximize short-term revenues. © 2001 Elsevier Science Inc.