A nested logit model of strategic promotion

This paper presents a test of the nature of the pricing and promotion game played by supermarket retailers in a large, U.S. market. Using a nested-logit modeling approach, the results show that retailers set discount depth and promotional frequency in a manner that is less competitive than Bertrand. We also find that the elasticity of substitution among competing stores is lower than among products within each store, but not equal to zero. Therefore, sales do cannibalize existing products, but can also build a significant amount of store-traffic. Relative to strategic factors, price promotions have their greatest impact on store-conditional product demand.

Timothy J. RichardsEmail: