Relating price sensitivity to retailer promotional variables and pricing policy: An empirical analysis

There is substantial evidence for variation in price sensitivity of products across stores and chains. Understanding the relationships between price sensitivity and promotional variables (such as price cut, feature advertising, and display), and between price sensitivity and pricing policy (Everyday Low Pricing [EDLP] and High Low Pricing [HLP]) is particularly important to retailers. We develop hypotheses on the relationships between regular price elasticity and retailer promotional variables, and between regular price elasticity and retailer pricing policy. We test these hypotheses by analyzing the variation of regular price elasticity of a frequently purchased consumer packaged brand across stores, both within and across chains, through a multistage regression analysis. In the first stage of our analysis, we use a mixed double-log model to estimate the sales response function for the brand in each store using time series data. In the second stage, we explain the differences in the estimated regular price elasticities across stores within a chain by a process function model. In the final stage, the differences across all stores and chains are explained through an aggregate process function model. We extend the literature by separating regular (long-run) price elasticily from promotional (short-run) elasticity and by studying the influence of both strategic and tactical retailer variables on regular price elasticity in a single framework within and across chains. Our results for the brand analyzed show that a higher level of display and feature advertising together is associated with a lower level of regular price elasticity in EDLP stores and that an EDLP policy is associated with a higher level of regular price elasticity, whereas an HLP policy is refuted to a lower level of regular price elasticity.