Dynamic Effects of Price Promotions: A large-scale Field Experiment

Abstract

We investigate whether promotion depth has dynamic effects on subsequent promotion sensitivity. In a large-scale field experiment we vary the promotion depth of top sale products across 17 categories in 12 supermarket stores. During the first half of the experiment we manipulate promotion depth by assigning staggered promotions with 30% and 10% discounts to treated and control stores, respectively. In the second half the staggering scheme assigns an even 10% to all stores. We find that treated customers are 14% more likely to buy promoted items during the second half of the experiment, and that the basket proportion of promoted items bought increases in approximately 21%. We develop and estimate a search model for deals in which consumer beliefs are based on historical promotion activity. We find that consumer search rationalizes our findings. Also, our model predicts that each firm could greatly benefit from heightened deal sensitivity in theory, but the gains might be off-set in equilibrium by the prisoner’s dilemma in deal activity that arises among manufacturers.