Volume 5, Issue 1

Prospectus for the Review of Marketing Science

An important decision facing retailers is the level of price promotions or "sales" to have in their retail prices. In this paper, we consider the use of promotion-free (PF) retail pricing by stores selling durable products, where PF pricing means that the retailer does not use or advertise price promotions. Interestingly, we find, contrary to the previous literature, that a store using a PF strategy does not advertise prices, and yet may charge below shoppers' reservation prices. Further, we show that a store can follow a PF pricing strategy in equilibrium, when competing with another store following a PF pricing or a promotional pricing strategy, and we characterize the conditions that support each type of equilibrium. The combination of PF pricing, the lack of advertisement of prices, and pricing below the reservation price may be similar to the pricing strategy followed by EDLP stores selling durable products. Our analysis yields insights on how a store may choose between a PF pricing strategy and a promotional pricing strategy in a competitive setting.

Accurately estimating consumer preferences for new products is an arduous task made difficult by the fact that individuals tend to exhibit a number of biases when answering hypothetical survey questions. Experimental auctions have advantages over conventional methods of estimating consumer preferences because they provide incentives for consumers to truthfully reveal their preferences. However, there is currently little information available to determine which mechanism to select among the class of incentive compatible mechanisms. In this paper, we provide insight into the theoretical properties of several incentive compatible value elicitation mechanisms including the Becker, DeGroot, Marschak (BDM) mechanism, Vickrey nth price auctions, and the random nth price auction. In particular, we draw attention to the shapes of the payoff functions and illustrate that the mechanisms differ with respect to the expected cost of deviating from truthful bidding. We show that incentives for truthful bidding depend on the distribution of competing bidders' values and/or prices and individuals' true values for a good. Our approach can be viewed as a diagnostic tool to aid in selecting between preference elicitation mechanisms.

Grocery store managers change prices on a weekly basis either as part of price promotions or in response to changes on their supply side. Consumers experience this price variability and may respond to it. Even though behavioral literature suggests that price variability affects consumers' decisions, most brand choice models have not focused on the consumers' response to such variability. This study attempts to remedy this omission and examine the effect of price variability on consumer brand choice. We use scanner data to show that price variability affects consumer's price sensitivity. We also find that accounting for the effects of price variability in brand choice models improves the model fit over conventional benchmark models. Our finding has important managerial implications for the strategic use of price variability.