Beruflich Dokumente
Kultur Dokumente
by
Peter Boatwright
Carnegie Mellon University
Graduate School of Industrial Administration
July, 2000
Revised, July 2002
Acknowledgements
Peter Boatwright is Assistant Professor of Marketing, Sanjay Dhar is Professor of Marketing, and
Peter Rossi is Joseph T. Lewis Professor of Marketing and Statistics. Support from the Kilts Center
for Marketing, Graduate School of Business, University of Chicago is gratefully acknowledged.
The Role of Retail Competition, Demographics and Account Retail Strategy as
Drivers of Promotional Sensitivity
July, 2000
revised, July 2002
Abstract
We study the determinants of sensitivity to the promotional activities of temporary price reductions,
displays, and feature advertisements. Both the theoretical and empirical literatures on price
promotions suggest that retailer competition and the demographic composition of the shopping
population should be linked to response to temporary price cuts. However, datasets that span
different market areas have not been used to study the role of retail competition in determining price
sensitivity. Moreover, little is known about the determinants of display and feature response. Very
little attention has been focused on retailer strategic decisions such as price format (EDLP vs. Hi-Lo)
or size of stores. We assemble a unique dataset with all U.S. markets and all major retail grocery
chains represented in order to investigate the role of retail competition, account retail strategy, and
demographics in determining promotional response. Previous work has not simultaneously modeled
response to price, display, and feature promotions, which we do in a Bayesian Hierarchical model.
We also allow for retailers in the same market to have correlated sales response equations through a
variance component specification. Our results indicate that retail strategic variables such as price
format are the most important determinants of promotional response, followed by demographic
variables. Surprisingly, we find that variables measuring the extent of retail competition are not
important in explaining promotional response.
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Introduction
Both the theoretical and the empirical literatures on the response to promotional activities
have focused primarily on response to temporary price reductions. The theoretical literature on
price promotions (c.f. Varian (1980), Narasimhan (1988), Lal, Little, and Villas-Boas (1996), Kim and
Staelin (1999)) emphasizes competition between retailers as the fundamental driver of short-term
price changes. On the other hand, in the empirical literature (e.g., Bolton (1989), Hoch et al (1995),
Shankar and Krishnamurthi (1996)) demographic factors have long been thought to be important
determinants of price sensitivity via various search-theoretic explanations in which the value of time
plays an important role in determining the extent of price awareness. No work has been done on the
This study examines the relative impact of the role of retail competition, demographic
factors and account retail strategy variables in determining not only price elasticities but also display
and feature response. This is particularly important given that little is known about the determinants
of display and feature response. Using scanner level tracking data, manufacturers often observe that
there are enormous differences between accounts and across markets in response to promotional
activities. (Boatwright, McCulloch, and Rossi (1999) advance a new methodology for measuring these
differences.) Due to insufficient data, many studies (such as Hoch et al (1995)) omit display and
feature measurements and focus only on price response. Since price reductions are often correlated
with display and feature response, this may produce an omitted variable problem. Ainslie and Rossi
(1998) document the relationship between demographic variables and display and feature but only
Furthermore, the extant empirical literature on price sensitivity has focused on only a limited
number of market areas (at most two as in the Bolton study). In one or two market areas, there can
be no variation in the basic structure of competition as indicated by the number and relative size of
retailers. Hoch et al use store-specific measures of retail competition, but the variation in the
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competitive climate within one or two market areas may be quite limited.1 Wittink (1977) studied
data from multiple markets, considering how price sensitivity is affected by different advertising
content.
In order to sort out the importance of retail competition, account retail strategy, and
demographic information, we assemble a unique dataset which spans all major U.S. market areas and
all major key accounts (a key account is a retailer-market combination, e.g., Safeway Denver). We
have complete display and feature ad information along with measures of retail competition, account
format, and demographics. We use a comprehensive sales response or demand model that
incorporates the effect of own price, display, feature, competing brand prices, and price at competing
retailers. This model is calibrated to weekly sales data at the key account level. Account aggregation
biases are reduced to the smallest possible extent using a method suggested by Christen et al (1997).
In addition, we provide a formal argument for why aggregation biases cannot affect the relative
Our goal of estimating promotion sensitivities and the relationship of these sensitivities to
account level competition in a market, account retail strategy, and demographic variables presents a
formidable estimation problem. There are about 100 key accounts and five basic promotion
variables, yielding some 500 or so response coefficients. A naïve strategy of estimating each account
model separately and then using the estimated coefficients in a second stage model does not properly
account for estimation error. If there is substantial estimation error in the account level response
coefficients, this sort of two-step approach may provide misleading views about the importance of
the explanatory variables. That is, the R-squared of the second stage regression can be low simply
due to estimation error rather than that the true coefficients are unrelated to these variables. In
We use a hierarchical approach in which each account level regression coefficient vector is
viewed as a draw from a random effects distribution that incorporates the account and market level
1
Bolton (1987) and Hoch et.al (1995) use data from multiple categories.
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competition, strategy, and demographic variables. We explicitly incorporate geographical markets in
our model by allowing retail accounts in a given geographical market to have correlated demand
shocks. We are the first to measure the common variance component in the demand shocks across
Our relatively small set of explanatory variables measuring competition, account retail
strategy, and demographics accounts for around 30 per cent of the variation in response.
Surprisingly, we find that the retail competition variables are the least important determinants of the
responsiveness to promotional activities. Account retail strategy variables such as price format and
chain size are important determinants of both price and display/feature responsiveness.
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A Framework for Selection of Explanatory Variables
combination) to the salient characteristics of the retail environment. In order to impose some
discipline on the process of selection of variables, it is useful to develop a framework for thinking
about response to promotions. Fundamentally, the promotions observed in retail scanner data are
various forms of temporary price reductions accompanied, in some cases, by in-store advertising
(displays) or out-of-store print ads (features). This advertising is designed to provide price
information and remind the consumer of the existence of the product. This is not image or
constraints and wealth, by availability of competitive alternatives, and by consumer search activity.
The variables included in our analysis therefore reflect an understanding what sorts of consumers and
Conceptually, it is possible to organize our discussion by categorizing the variables that may
affect consumer response to temporary shelf-price reductions, display and feature activity into three
Consumer Characteristics
Income or Wealth: Becker (1965) proposed that systematic differences in price sensitivity
could arise from the opportunity costs of time associated with demographic characteristics (Blattberg
et al. 1978). Higher income consumers (who also tend to live in higher home value neighborhoods)
have higher opportunity costs of time and are likely to be less price sensitive. Consequently, they are
likely to have a lower response to temporary shelf price reductions. However, these very consumers
are time constrained and consequently use feature advertisements and in-store displays to reduce
their search costs and are therefore more likely to respond to non-price retail promotional activity.
Age: Older consumers are likely to have lower opportunity costs of time and therefore more
likely to engage in more search for lower prices and therefore more likely to respond to temporary
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shelf-price reductions. However, elderly consumers face physical and cognitive constraints and are
more likely to rely on feature advertisements and displays to reduce their search costs.
Private Label Share: Consumer price sensitivity is correlated with private label share, even
after controlling for other demographic factors and price format. Consequently, we expect that the
higher the private label share, the larger the size of the price sensitive segment and higher the
Price Format of the Retail Chain: With less promotional activity and an assurance of low
everyday prices, consumers who shop at EDLP retail chains are less likely to be sensitive to price
changes of individual products and therefore less responsive to temporary shelf-price reductions
(Hoch, Drèze and Purk 1994). Bell and Lattin (1998) also report that larger market basket shoppers
are less responsive to prices in individual categories and tend to shop at EDLP chains. To the extent
that feature advertisements and display activity call attention to price cuts, EDLP chains are likely to
Number of Stores and Assortment Carried: An important decision that retail chains face is
where to locate their stores and the breadth and depth of assortment to carry. Locating close to
consumers is critical to help a retail chain build its market share, and having more stores in a
geographic market helps the chain to capture most of its potential market. Due to the consequently
reduced population of consumer switchers, retail chains with more stores in a geographic market do
not tend to get as much benefit in sales from using feature advertisements as chains having fewer
stores. Similarly, with more stores in a market, consumers are more likely to find a store for the chain
near their home that they make most of their purchases at and whose layout they become quite
familiar with. In this situation, displays are less likely to reduce search costs of consumers.
Retail Competition
More retail competition in a market facilitates price comparison that could heighten the price
sensitivity of consumers, causing them to be more responsive to temporary shelf price reductions.
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Previous research has shown significant cross-store effects at the brand level for a few product
categories (e.g., Kumar and Leone 1988; Walters 1991). Similarly, in competitive markets, feature
advertisements may be used to compete for customers (as in Lal and Matutes, 1994), and for this
reason features may be more effective in stimulating sales in the more competitive markets. Displays
facilitate in-store decision making of what to purchase and hence may benefit retail chains in more
For ease of reference, we summarize the effects of the different variables in Table 1 below.
Note that price sensitivity is negative, so a '+' in the table indicates increased price sensitivity, which
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Model and Datasets
In order to study the relationship between account retail strategy, competition, and
demographic variables and promotion sensitivities, we need sales and promotional data across
different retailers and different market areas. We have to combine scanner data on the sales volume
and price with demographic data and data on market and account (retailer-market combination)
characteristics. There are no academic or industry sources of data panels which are comprehensive
enough to include sufficient variation in market and chain characteristics (note: the national panels of
households maintained by IRI and Nielsen do not include audit information on store displays or
feature ads – it is impossible to accurately measure what display and feature activity was faced by the
household on any given purchase occasion). There are national samples of stores maintained both
by IRI and Nielsen (INFOSCAN and SCANTRACK). These samples also include audit information
on displays and feature ads. It is the policy of both IRI and Nielsen not to release store level
information (note: the MSI/Nielsen data sets do not include retailer identifiers and only include a
small number of markets). For this reason, we are limited to what Nielsen and IRI term “account”
level data. An “account” is a particular market-retailer combination, e.g. Safeway in Denver. The
information from the Nielsen sample of stores is aggregated to the account level. As discussed
Through the intercession of a major Nielsen client, we were able to obtain account level data
for 97 major US retail accounts across 35 Nielsen SCANTRACK markets for the ground coffee
product. For example, this means that Safeway–Denver is distinct from Safeway–Salt Lake City. We
focus on the two major national brands, Folgers and Maxwell House, which account for 59% of the
category total sales. Other secondary national brands have very spotty distribution, so that it would
be difficult to use all 97 accounts. Our SCANTRACK data contain weekly sales, price, display, and
Our 97 accounts are located in 35 different geographic markets. It has often been
speculated that there are market-wide shocks that affect each of the accounts in a given market.
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Television advertising and manufacturer coupon drops are often cited as possible examples. If there
were large and regular market-wide shocks, then the accounts within a market would have correlated
sales response equation errors terms. To measure the size of these market-wide shocks, we employ a
ln ( yamt ) = x amt
'
β a + εamt a = 1,K , Am m = 1,K ,35 t = 1,K ,120 (1)
Equation (1) reflects the structure of our data in which each of the 97 accounts are located in 35
different geographic markets (e.g. Winn-Dixie in Raleigh-Durham or Publix in Miami). Each market
(indexed by m) has up to Am accounts in it. The error term, ε, has a variance component structure –
εamt = w mt + v amt
cov ( w mt , v amt ) = 0
v amt ~ N (0, σam
2
)
w mt ~ N ( 0, σ 2m )
This variance component structure allows for a positive covariance between accounts in the same
Since consumer promotions are planned on the level of the account (Boatwright, McCulloch, and
Rossi 1999), we assume correlation across accounts within a chain to be negligible, although this and
1. intercept
2. ln(price of brand)
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6. ln(price of competing brand at the retail account)
8. ln(lag(sales))
Thus, our sales response model allows for account level sensitivity to all of the marketing mix as well
as competitive brand and competitive account prices. Our model includes lagged sales to allow for
autocorrelated errors. In addition, we investigated other model specifications which included base
(regular) price, multiple variables to capture seasonal effects, alternative specifications of prices of
competing brands in the same account, and alternative specifications of prices at competing
accounts. Our final model contains those variables that were consistently important in the many
specifications that we investigated. Also our final model contains one own price variable instead of a
regular price and discount measure. Base price and actual price are highly correlated (r=0.94),
preventing us from estimating separate short term and long term price effects. In order to investigate
the relationship between the account-level promotion sensitivities (βa) and retail competition,
account retail strategy, and demographics variables, we employ a hierarchical model structure with a
second level that allows the promotion sensitivities to be related to both our observable variables and
a random component,
where z is the vector of retail and demographic variables and Θ is a matrix of regression coefficients.
In previous work (Hoch et al (1995) and Shankar and Krishnamurthi (1996)), the sales
response model in (1) is estimated first and the estimated coefficients are then regressed on
explanatory variables in a second regression. It is well known that this is an inefficient procedure.
Furthermore, the goodness of fit in the second regression is not an unbiased estimate of the extent to
which the explanatory variables can explain variation in promotion sensitivity. Since there is
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measurement error in the estimates of account level promotion sensitivity, the R-squared from the
second step equation will underestimate the goodness of fit. For these reasons, we do not use a two-
step estimation procedure, but, instead, we estimate the system (1-2) simultaneously in a
Bayesian hierarchical model approach. That is, we regard (2) as a random coefficient model and
We first specify the distribution of the error terms in (1) and (2)
(
εat ~ N 0, σ2a )
(
u a ~ N 0 , Vβ )
Note that we allow for correlation between the components of the β vector by allowing a non-
σ2a ~IG ( υ, τ)
vec ( Θ ) ~ N ( Θ, VΘ )
In any hierarchical model, the prior on Vβ plays a critical role. Adaptive shrinkage requires a
relatively diffuse prior in order for the data to dictate the amount of “shrinkage” or partial pooling
that takes place across accounts. It is well known that the standard inverted-Wishart prior has a
number of defects. It can be difficult to assess a relatively diffuse prior, and the inverted-Wishart
prior cannot be used in cases where one wants diagonal elements of Vβ to be relatively large or small
for different elements of the regression vector. For these reasons, we adopt the approach of
Barnard, McCulloch, and Meng (2000). In the Barnard et al approach, Vβ is decomposed into the
Vβ = diag(s)Rdiag(s)
s i ~ logn( µi , σ i )
p ( R ) ∝ 1 × I correl ( R )
That is, on the correlations we use a flat or uniform prior over the space of positive definite matrices,
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Explanatory Variables: Account Retail Strategy, Competitive Characteristics, and Demographics
The second level of the hierarchical model (eqn (2) above) relates each of the seven response
coefficients to account retail strategy, retail competition and consumer demographic variables
identified earlier. These data were obtained from several sources. A syndicated data service provided
detailed demographic distributional information on demographic variables for each account. Two
published secondary data sources, Market Scope, and Marketing Guidebook, provided additional
information on the characteristics of the retail chains and the markets served. Both publications are
well-known sources published annually by Trade Dimensions, a unit of the Progressive Grocer Data
Center. We also surveyed each of the retail accounts in the database for additional information.
The variables constructed to measure account retail strategy include 1). Chain size – the
number of stores each chain operates in a particular market; 2).EDLP/Hi-Lo (EDLP) – from a
survey of accounts (see Dhar and Hoch (1997)); 3)Floor Space per Capita (FLOOR.SP) – average
square footage / population size for an account. This serves as a proxy for the breadth and depth of
assortment carried.
2
Retail competition is measure by a Herfindahl (HRFNDL) index, ∑ a s a , where s is the
market share of account a. The Herfindahl index is lower, the higher number of accounts in a
market and the more equal-sized the share of those accounts are. Thus, lower Herfindahl values are
home value (HOMEVAL) – the fraction of the total number of households for a retail account’s
customer base owning homes with a value higher than $250,000. This variable is highly correlated
with income level. Age is measured by the fraction of an account’s customer base that is older than
55 years (ELD). Finally, we use Private Label Share (PVT.LBL as a proxy for the size of the price
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All of the above measures are computed at the account level. There are seven explanatory
Table 2 provides summary statistics for the distribution of these explanatory variables. The wide
variability of each of these measures across accounts and markets is striking. For instance, the range
of the Herfindahl index, 0.04 to 0.36, indicates large variation in the extent of retail competition
across the markets. Similarly, the percent of elderly in the shopping populations for these accounts
ranges from around 12% to around 34%. As for EDLP (not shown in Table 2), 34% of the 97
accounts consider themselves to follow an EDLP pricing strategy. It should be emphasized that
even in the empirical I/O literature it is rare to see studies that consider such a wide range of
competitive conditions.
Our account level data are at a lower level of aggregation than typically used in the empirical
I/O literature (where data are usually aggregated to the market or higher (see Berry, Levinsohn and
Pakes (1995) or Nevo (2001)). However, the nonlinear nature of the basic sales response model in
(1) creates the possibility of aggregation biases. As Allenby and Rossi (1991) point out, aggregation
biases occur under the condition that consumers in the aggregation unit are not uniformly exposed to
the same marketing action. In our data, the display variable is the major problem. Display activity is
a store-specific phenomenon. Thus, without any correction, the display coefficients can be biased
upwards as Christen et al (1997) document. The possible solutions to the aggregation problem
include obtaining store level data or making some of the adjustments that are advocated by Christen
et al. Both IRI and Nielsen have a policy of not releasing store-level data across many markets with
account identifiers. For example, the MSI/Nielsen store level datasets do not include retail chain
identifiers so that we could not merge our market and retail competition and strategy dataset with the
sales data.
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Given the lack of store level data, we have chosen to adjust our account level data in a
manner suggested by Christen et al. While the account level data do not offer the detail of store level
data, we are able to obtain a decomposition of unit sales under various merchandizing conditions.
For example, we have not only total unit sales but also unit sales for five groupings of stores: stores
with 1. displays without feature, 2. feature without display, 3. display and feature, 4. price discount
observation into five disaggregate observations corresponding to the five groups above. Christen et
al demonstrate that this method removes a great deal of the aggregation bias.
Since the stores accounting for the sales volume vary over time within an account, i.e.
different collections of stores are grouped over time, the average sales of the groups varies over time.
In order to make the groupings comparable, and thus calculate response statistics across partitions
and time, we normalize sales of a store group and partition lagged sales of the account by "baseline
dollars" of the brand for the group. Calculated from store level data by ACN, baseline dollars
measures the non-promoted sales of the partition, i.e. the typical level of sales of that particular
collection of stores in periods when those stores do not offer any promotions. Our dependent
measure of sales yagt, then, is the log of the ratio of coffee unit sales (pounds) and baseline dollars
sales for account a=1…A, group g=1…5, in week t=1…T and our independent variables are the
corresponding price and merchandizing measures for each of the accounts and each of the five
promotion groups.
It should also be pointed out that we are primarily after the relationship between promotion
sensitivity and various account/consumer variables. Level shifts due to aggregation bias will not
distort these relationships. That is, the relative importance of variables in explaining variation in
promotion sensitivity is not affected by aggregation bias. For our analyses, aggregation biases can
only cause a serious problem if the magnitude of aggregation bias varies by account and if the extent
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Results
Figure 1 shows the distributions of each of the promotion response coefficients across the
97 accounts. Price elasticities are negative; most of the mass of the distributions is in the range
between -1.06 and -1.82. For ease of interpretation, we have exponentiated the promotion sensitivity
coefficients so that they report percentage increase in sales due to the promotion (sometimes referred
to as lift). On average, features increase sales by 56%; most of the mass of the effect of features
ranges between an 18% increase and a 112% increase. The effect of a display ranges from 10% to
65%; on average it increases sales by 34%. On average, simultaneous features and displays increase
sales by 100%. The average sensitivity to price at other accounts is 0.10, and the average sensitivity to
We now turn to a discussion of how these promotion sensitivities relate to account retail
strategy, retail competition, and consumer demographic variables. We summarize these relationships
by considering the posterior distributions of the elements of Θ , which are regression coefficients
from (2). Each row of the Θ matrix contains a vector of regression coefficients.
θ'intercept
'
θprice
θ'display
Θ= '
θfeature
θ'display&feature
θ'comp account price
θ'compbrandprice
For example, the second row of (2) is the price elasticity regression.
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Price Response
The boxplots in figure 2 show the posterior distributions of the elements of Θ that relate to
the own price elasticity.3 Each of the continuous explanatory variables has been standardized with a
mean of zero and standard deviation of 1 so as to facilitate comparisons between coefficients on the
same scale. Figure 2 clearly shows that the EDLP format and private label shares are the most
important determinants of own price elasticity. Because EDLP is a discrete variable, the magnitude
of its coefficient cannot be directly compared with the remaining coefficients. Even so, the mass of
the posterior is positive for both brands. Consumers who shop at accounts with an EDLP pricing
strategy are less sensitive to short term price changes than consumers at non-EDLP accounts. This
is entirely consistent with an interpretation of EDLP as a signal of lower mean price and lower
variance (see Hoch, Drèze, and Purk (1994)). Consumers at an EDLP account can be assured of
lower average prices and do not have as much incentive to track deals and switch stores as
consumers in a non-EDLP, Hi-Lo account. Bell and Lattin (1998) report the finding that large
market basket shoppers are less responsive to prices in individual categories and tend to shop at
EDLP chains.
Our results are somewhat different than those of Shankar and Krishnamurthi (1996) who
found that shoppers in EDLP chains have higher regular or long-run price sensitivities, using a much
more limited sample of only 2 accounts. There is not necessarily a contradiction between our results
on short-term promotional price response and the results of Shankar and Krishnamurthi. As noted
above, we do not include regular price terms in the sales response model due to insufficient variation
in regular prices. It could well be that EDLP shoppers do not respond to deals but are sensitive to
2
The averages given here are medians, while the ranges given are the 10% and 90% quantiles. The statistics
and boxplots for the β coefficients give results only for Folgers.
3
In the boxplots, the box indicates the range from the 10% to the 90% quantiles, while the whiskers show the
full range of the posterior.
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We also find that own price sensitivity is positively correlated with private label share, even
controlling for retail format and consumer demographics. Dhar and Hoch (1997) and others who
have studied private labels have long speculated that private label shoppers are more price sensitive
than other shoppers either due to budget constraints or to smaller quality difference perceptions. We
Display/Feature Response
With the exception of Ainslie and Rossi (1998) (which only considers one market and one
chain), little work has been done on the relationship between in-store display and feature ad
sensitivities and any observable account level variables. Given the huge expenditures of CPG
manufacturers on trade promotions for the purpose of obtain display and feature support, any
evidence in this area is very relevant to trade practice. For example, a number of manufacturers
would like to measure the relative effectiveness of display/feature activities for each key account in
order to design the optimal mix of promotions. Account level regression modeling is often
frustrated by the lack of precise coefficients as well as implausible magnitudes or signs (c.f.
Boatwright, McCulloch, and Rossi (1999)). If some general characteristics of the account were
found to relate to display or feature response, this finding would be valuable in targeting trade
Figure 3 shows the relationship between display sensitivity and our account explanatory
variables, and Figure 4 gives these relationships for feature sensitivity. Unlike price elasticity, many
of the account level characteristics are strongly related to promotion response. EDLP accounts are
much less responsive to displays and to features. Since promotions are often used to call attention to
price cuts, this is consistent with the view that EDLP shoppers are less price aware and less
responsive to deals.
Household wealth as measured by the housing value proxy is positively correlated with feature
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response. This is consistent with a search cost view of display and feature advertising. Displays
reduce in-store search costs while features reduce out of store search costs. The wealthy have a high
opportunity cost of time and, thus, the reduction in search costs is more important in the sense that
more search behavior can result from a given reduction in search costs. Similarly, the elderly
consumers are more display responsive and feature responsive, which again is consistent with the
search cost view of promotions, since the elderly may have greater cognitive and/or physical
constraints.
Our findings resolve a number of puzzles in the literature on price sensitivity (at least in the
context of the coffee category). Hoch et al find that the elderly are often more price sensitive. Since
display activity was not measured in the Hoch et al data and displays and price cuts are correlated, the
findings of Hoch et al can be explained by an omitted variable bias. The proper interpretation of the
data is that the Elderly are more promotion rather than price sensitive. Since promotions and price
cuts are often correlated, the Elderly will appear more price sensitive in models without these
variables. Dhar and Hoch (1997) hypothesized that if the elderly were more price sensitive, they
would be more likely to purchase private labels. However, Dhar and Hoch did not find the elderly to
be more likely to purchase private labels. If in fact elderly are promotion sensitive rather than price
sensitive, as our results suggest, we would expect the elderly to appear price sensitive with respect to
the heavily promoted national brands but not particularly prone to purchase the less promoted and
Finally, we find that private label share is positively correlated with display sensitivity and
with feature sensitivity, suggesting that private label buyers are more promotion sensitive than other
buyers. The coffee category is unusual in that private labels, at a national level, command 9.3%
market share, which is 3rd place, ahead of all brands except for Folgers and Maxwell House. Those
accounts with stronger private label coffees may be category leaders in their market, i.e. the strength
of the private label share could in part reflect strategic decisions of a retail account in the coffee
category
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Figure 5 provides the results for feature sensitivity and display and feature sensitivity. These
results are similar to display activity and to feature activity, with the elderly showing a greater
Also, the feature sensitivities are negatively related to chain size. This supports our earlier
discussion that the higher the number of stores that an account has in a market, the closer they are
located to consumers. In this situation, displays are less likely to be effective, as consumers are
already familiar with their neighborhood store’s layout and hence do not reduce in-search costs.
Furthermore, the proximity that the account’s stores have to consumers in the market also reduces
the potential number of consumers that can switch leading to feature advertising being less effective
In order to measure the effect of prices at other competing accounts in an account’s market
area, we included a measure of the price of the item at competing accounts (defined as the minimum
of price in that week at other accounts in the market). There are large variations in both the degree
of response to this variable (Figure 1) as well as in the competitive conditions across market areas
(Table 2). This is the only sensitivity for which we find an effect of variation in retail competition.
As might be expected, in market areas with greater competition as defined by the Herfindahl index,
In order to capture brand-switching effects within the same account, we also included the
price of the major competing brand (Folgers in the Maxwell sales model and Maxwell in the Folgers
model). The EDLP format variable is important in explaining account variation in this cross-
elasticity. As might be expected from the discussion of own price elasticities, customers at EDLP
format stores are less sensitive to competing brand prices. The chain size variable also explains some
of the account variation in this elasticity, indicating that consumers at accounts with more stores per
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capita are less sensitive to price changes of competing brands. This result is similar to the findings of
Ho, Tang, and Bell (1998), where in this case the lower travel costs associated with their trip to a
close store may more than compensate for the higher prices that they may pay.
We have related three groups of variables to promotion sensitivity: i. Retail competition, ii.
Account retail strategy, and iii. Consumer demographics. In order to assess the relative importance of
each group, we compute an R-squared like measure of the contribution of each group to the
explanation of the variability of the promotion sensitivities. To do this, we partition the matrix Z
into Z1, Z2, and Z3 that correspond to the three groupings of variables, fitting the models where Z is
replaced by Z1 and by [Z1 Z2]. Z1 contains the intercept, so all models were fit with an intercept. We
calculate the R-squared measure for each model using the formula (Model SS)/(Total SS), where
Total SS refers to the sums of squares of the estimates of the sensitivities, and Model SS refers to the
sums of squares of the predicted sensitivities, which is ZΘ for the full model. We model the two
brands, and we report price, display, feature, feature & display, store competitor price, and brand
competitor price results for each brand, giving 12 R-squared measures for each model. Also, we can
calculate R-squared for each draw, meaning that we get 12 distributions of R-squared measures for
The explanatory factors account for around 30% of the variation in almost all of the
consumer sensitivities. For instance, the explanatory factors explain 31% and 26% of the variance in
price sensitivity for Maxwell House and Folgers, respectively. Retail competition accounts for very
little of the variation in price sensitivities (3% and 4%). Account retail strategy accounts for more of
the variation in price sensitivities (11% and 12%), and demographics explain close to the same
As for response to display and feature activity, demographics and account retail strategy each
explain roughly equal portions of the variance (around 12%), and retail competition explains about
- 21 -
6% of the variance in consumer response. The explanatory factors also account for a large percent
of the variation in the cross-price sensitivities, close to 40% for Maxwell House for both the brand
Our sales response model includes a variance components error specification. This
specification breaks the regression error into a market wide component, which is common to all
accounts in the same geographic market, as well as an account-specific component. In some recent
work in marketing (c.f. Villas-Boas and Winer (1999)), this common component has been identified
as a possible source of endogeneity (if retailers can predict this common component and change
prices as a function of the component). We can provide some direct evidence on the size of this
component by exploring the relative size of the variances of the market-wide and account variances.
Figure 8 provides a histogram of the posterior median of σ2m ( σ2m + σ a2 ) for each of our 97
accounts for the Maxwell House regression errors. For the bulk of the accounts, the common
Specification Searches
We approached the choice of explanatory variables using the framework outlined above.
Only variables that could be justified on a priori grounds were included as measures of consumer
demographics, retail competition or account retail strategy. In some cases, variables were collected
but found to have insufficient independent variation to be included in the model. In this section, we
briefly discuss some variables that were not included and explain why.
In our model, we used home value as a proxy for household wealth. Other possible proxies
include income and education. Income is often found to be a poor proxy for wealth, as it does not
include flows from physical, financial, and human capital assets. In addition, census measures of
- 22 -
income have been found to be subject to large measurement error. Education is highly but not
Some have included ethnicity as an explanatory variable. We have elected not to include
ethnicity in our results reported above as there is no real theory that can account for effects of
ethnicity once wealth and household composition is controlled for. In specifications not reported
here, we found that Hispanic and black consumers are less price responsive.
We employ the Herfindahl index as a measure of degree of retail competition. It captures the
effect of both the number of chains in a market and the distribution of shares across these chains.
We also tried to include the retail market share that an account has as a measure of “clout” they have
in a market. However, this measure was correlated with the Herfindahl index and could not be used.
Finally, the presence/absence of private label coffee was not included as a account retail
strategy variable, as only one of the 97 accounts in our sample did not have a private label coffee
brand.
- 23 -
Conclusion
From an empirical point of view, little is known about the determinants of differential
response to promotion activities. Earlier work has focused only on price elasticities in a limited
number of market areas. The use of one or two market areas means that account retail strategy and
competition variables cannot be investigated. With the exception of Ainslie and Rossi (1998),
virtually no work has been done on the determinants of response to display and feature advertising.
We assemble a unique data set that spans all major US market areas and includes account
retail strategy, retail competition, and demographic variables. We also have access to display and
feature advertising information that allows computation of display/feature sensitivities for each
major retailer-market combination. We conduct our analysis at the key account level. This is the
relevant unit of analysis for retail competition and account retail strategy. We adjust our analysis for
possible aggregation bias, following the suggestions of Christen et al. Two stage estimation methods
used in past studies are less efficient than our simultaneous Bayesian hierarchical method. This
Collectively, account retail strategy, retail competition, and demographic variables can
explain about 30 per cent of the variation in promotion sensitivity. Most surprising is our finding
that retail competition variables are the least important in explaining response to promotional
activities. The only detectible relationship is between retail competition and the cross-elasticity of
prices across accounts in the same market area. On the other hand, account retail strategy variables
such as price format and store size are quite important in explaining both price elasticity as well as
display/feature advertising response. Since our analysis includes advertising variables, we are able to
better understand some of the puzzling results of earlier work relating demographics to price
4
In order to address potential endogeneity concerns and to see if instrumental variables approaches would
affect our results, we projected prices on market-level wholesale price data (specifically collected for this study
from Leemis) and used the fitted values from these regressions in our hierarchical model (the regressions also
included account dummies and interactions of account dummies with the market-level wholesale prices).
Unfortunately, we find that with instruments in our hierarchical model removes all account level time series
information in the data and there is insufficient information to measure the relationship between the
- 24 -
response. In fact, it turns out that certain demographic groups (such as the Elderly) are not more
price elastic per se but are more advertising responsive. Taken as a whole, our results call attention to
the importance of account retail strategy variables and to the non-trivial interaction between price
promotional sensitivities and our explanatory variables. Finally, we want to argue that endogeneity biases, like
aggregation biases, are unlikely to affect the relative importance of the explanatory variables.
- 25 -
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Table 1
- 28 -
Table 2
Descriptive Statistics
- 29 -
Table 3
Relative Importance of Account Retail Strategy, Retail Competition and Demographics in Explaining
Promotion Sensitivity
Account
Feat & Price Brand Price
Model Price Display Feature Disp Comp Comp
Full Model Maxwell 31% (10%) 33% (11%) 24% (9%) 23% (9%) 41% (14%) 43% (13%)
Folgers 26% (10%) 22% (9%) 28% (10%) 31% (10%) 35% (14%) 24% (11%)
Retail Strategy & Maxwell 14% (8%) 17% (9%) 17% (8%) 15% (8%) 11% (8%) 18% (9%)
Competition Folgers 16% (8%) 8% (6%) 15% (7%) 14% (7%) 29% (14%) 15% (9%)
Retail Maxwell 3% (3%) 7% (6%) 6% (5%) 9% (7%) 4% (5%) 3% (4%)
Competition Folgers 4% (4%) 3% (4%) 3% (3%) 6% (5%) 26% (14%) 4% (5%)
Note: Figures in parentheses are standard deviations of posterior distributions of the R2 measure
- 30 -
Figure 1
Price Display
3
Price Response
-1.0
Display Lift
2
1
-2.0
0
-3.0
10 15 20
Feature Lift
0 2 4 6 8
F & D Lift
5
0
1.0
0.0
0.0
-0.6
-1.0
- 31 -
Figure 2
Relationship between Price Response and Account Retail Strategy, Competition and
Consumer Demographic Variables
Price Response
M F M F M F M F M F M F M F
M Maxwell
0.4
F Folgers
0.2
0.0
-0.2
Chain Size
Homeval
Floor.Sp
Pvt.Lbl
Hrfndl
EDLP
Eld
- 32 -
Figure 3
Relationship between Display Response and Account Retail Strategy, Competition and Consumer
Demographic Variables
Display Response
M F M F M F M F M F M F M F
0.2
0.1
0.0
-0.1
-0.2
M Maxwell
F Folgers
-0.3
-0.4
Chain Size
Homeval
Floor.Sp
Pvt.Lbl
Hrfndl
EDLP
Eld
- 33 -
Figure 4
Relationship between Feature Response and Account Retail Strategy, Competition and Consumer
Demographic Variables
Feature Response
M F M F M F M F M F M F M F
0.2
0.0
-0.2
M Maxwell
F Folgers
-0.4
-0.6
Chain Size
Homeval
Floor.Sp
Pvt.Lbl
Hrfndl
EDLP
Eld
- 34 -
Figure 5
Relationship between Feature and Display Response and Account Retail Strategy, Competition and
Consumer Demographic Variables
M F M F M F M F M F M F M F
0.2
0.0
-0.2
M Maxwell
F
-0.4
Folgers
-0.6
Chain Size
Homeval
Floor.Sp
Pvt.Lbl
Hrfndl
EDLP
Eld
- 35 -
Figure 6
Relationship between Response to Competing Account Price and Retail Strategy, Competition and
Consumer Demographic Variables
M F M F M F M F M F M F M F
0.1
0.0
-0.1
-0.2
M Maxwell
F Folgers
Chain Size
Homeval
Floor.Sp
Pvt.Lbl
Hrfndl
EDLP
Eld
- 36 -
Figure 7
Relationship between Response to Competing Brand Price and Account Retail Strategy, Competition
and Consumer Demographic Variables
M F M F M F M F M F M F M F
0.2
0.0
-0.2
M Maxwell
F Folgers
-0.4
Chain Size
Homeval
Floor.Sp
Pvt.Lbl
Hrfndl
EDLP
Eld
- 37 -
Figure 8
Posterior Median of Relative Variances – Maxwell House Regression Errors
15
10
5
0
- 38 -