Estimating the Effects of Brand Switching, Stockpiling and Flexible Consumption with Consumer Heterogeneity -- a Dynamic Structural Approach

It is well known that in package goods categories a temporary price cut of a brand leads to increase in the sales of that brand in the current period. Under the assumption of stable consumption rate, previous literature has identified that the sources for the increase in sales are brand switching, purchase acceleration, and increase in quantity. However, there are very few studies that have formally modeled the impact of price promotions on consumption when consumption rate in a category is not constant. In this paper we offer a methodology to decompose the effects of price promotions into brand switching, stockpiling and change in consumption and explicitly allow for consumer heterogeneity in brand preferences and consumption needs. A dynamic structural model of a household that decides when, what, how much to buy as well as how much to consume to maximize its expected utility over an infinite horizon is developed. By making simplifying behavior assumptions we enable to reduce the dimensionality of the problem. We estimate the proposed model using scanner panel data of 1000 households on canned tuna purchases for 12 product alternatives over a two-year period. The results from the model shed insights on the decomposition of the price elasticity into its components that could help managers make inferences about for which brands and categories household stockpiling and consumption expansion occur as well as understand how temporary price cuts affect future sales. Contrary to previous literature, we find that brand switching is not a dominant force for brand sales increase. We also find that a household's brand preference has significant impact on its stockpiling and flexible consumption behavior. More specifically, we show that brand loyals respond to a price promotion mainly with stockpiling for future consumption while brand switchers do not stockpile at all. We also find that heavy users stockpile more and increase less consumption than light users when there is a price promotion.