The Dynamics of Consumer Response to Price and Promotion

This research examines the nature of dynamic consumer response to point-of-purchase pricing and promotional activity. The authors begin with the premise that consumers form expectations about future pricing and promotion based on their exposure to such activity, and that consumer response is influenced by the disparity between the observed marketing activity and the point of reference established by the consumer. The approach differs from existing research in two ways: first, the model focuses on the dynamic effects of promotional activity (i.e. feature and/or special display) separate from the effects of changes in price; second, a threshold model is introduced to capture the formation of the consumer's promotional reference points. The authors calibrate a model of brand choice using IRI scanner panel data on ground coffee. The findings suggest that there are significant reference effects of promotional activity on consumer response, and that controlling for these promotional dynamics, the effects of reference price appear to be nonsignificant.