ANOTHER LOOK AT PRICE PROMOTION

Authors

  • WEN CAO

    1. Department of Decision Sciences and Managerial Economics, Faculty of Business Administration, The Chinese University of Hong Kong, Hong Kong, China.
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    • Author's affiliation: Department of Decision Sciences and Managerial Economics, Faculty of Business Administration, The Chinese University of Hong Kong, Hong Kong, China.
      e-mail:claracao@baf.msmail.cuhk.edu.hk


  • *I am grateful to my advisor, Professor Michael R. Baye, for his guidance and encouragement. I also thank two anonymous referees, the Editor, and the participants at the BEPP seminar at Indiana University, Bloomington, U.S.A. for their helpful comments and suggestions.

Abstract

Weekly sales at retail stores exhibit several patterns that the literature on price promotion does not fully capture. In this paper we develop a simple symmetric model where duopoly manufacturers distribute through a monopoly retailer to serve consumers with heterogeneous reservation prices. We show that the heterogeneity in consumers' reservation prices coupled with the retailer's market power is sufficient to resolve the deficiency in the literature. We then show that, while pricing patterns under this model differ significantly from those under a model where the retailer has no market power, the manufacturers' expected profits are the same in both cases.

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