Price Promotion by Multi-Product Retailers

This paper examines the rationale underlying periodic price promotions, or sales, for perishable food products by supermarket retailers. Whereas previous studies explain sales in a single-product context as arising from informational, storage cost, or demand heterogeneity, this study focuses on the central role of retailers as multi-product sellers of complementary goods. By offering a larger number of discounted products within a particular category, retailers are able to offset the effect of lower margins on sale items by attracting greater volume for higher margin items. The implications that emerge from the resulting mixed-strategy equilibrium are tested in a product-level, retail-scanner data set of fresh fruit sales. Hypotheses regarding the rationale and effectiveness of sales are tested by estimating econometric models that describe: (1) the number of sales items per store, (2) the depth of a given sale, and (3) promotion effectiveness on product and category demand. The results of this econometric analysis support the hypothesis that the breadth and depth of price promotions are substitute marketing tools, but show that promoting many products with small discounts is likely preferred to relying on a few loss-leaders. keywords: mixed-strategy equilibrium, loss-leadership, price promotion, price dispersion, retailing, sales.