Asymmetric Store Positioning and Promotional Advertising Strategies: Theory and Evidence

Rajiv, Surendra; Dutta, Shantanu; Dhar, Sanjay K.
January 2002
Marketing Science;Winter2002, Vol. 21 Issue 1, p74
Academic Journal
Asymmetrically positioned retailers, who vary in the quality/ in-store service offered, are increasingly using promotional advertising�the practice of advertising sale prices on familiar merchandise lines�to compete for customers who are willing to comparison shop. The objective of this paper is to examine the role of promotional advertising for stores that vary in their quality positioning in competing for customers using a game-theoretic model. Our focus is on two key retail promotional advertising decisions: the frequency with which to advertise price reductions and the accompanying depth of discount. We consider a stylized duopolistic retail market with the two stores that differ in their service positioning. We assume that each store enjoys a relative advantage in serving a subset or segment of customers who regularly visit it and whom we call "patrons" of the store. We assume that it costs more to shop at the less-frequented store. We further assume that consumers are only partially informed about the prevailing retail prices�while they perfectly know the posted price at the store that they patronize, they are uncertain about the price at the other store and have rational expectations about these prices. Consumers in this market differ on three dimensions: preference for service, shopping costs, and store switching costs. We explicitly consider two consumer segments differing in their willingness to pay for service. Furthermore, we assume store switching is more costly for the high-valuation segment. We allow for within-segment heterogeneity by assuming that consumers differ in their shopping costs. Our analysis shows that if promotional advertising is not "too costly," the equilibrium strategies of the competing retailers entail occasionally posting its "regular" price but not advertising that price and on other occasions posting its "sale" price and advertising that price. The analysis also suggests that promotional advertising is driven by "offensive" (traffic-building) as well as "defensive" (consumer-retention) considerations. Furthermore, the relative importance of offensive and defensive considerations is influenced by the service positioning of the stores. Specifically, relative to the low-service store, promotional advertising by the high-service store is driven more by offensive consideration than defensive consideration. Finally, a store's service positioning impacts its frequency of promotional advertising and the depth of discount that it offers during "sale." Specifically, relative to the low-service store, the high-service store offers advertised sales more frequently but with shallower discounts. These results follow from the fact that differences in service positioning lead to a natural consumer "self-selection." Specifically, the consumer-mix of the high-service store comprises a higher fraction of the high-valuation consumers who are less sensitive to promotional advertising due to their higher store switching costs. Thus, if the low-service retailer were to build store traffic by targeting the customer mix of the high-service retailer (motivated by offensive consideration), it has to offer deeper discounts; yet the demand enhancement is lower. Thus, relative to the high-service store, promotional advertising is not that attractive for the low-service store. However, the low-service store still relies on offering discounted prices occasionally to retain its customer base. Thus when using promotional advertising to attract and retain customers, the high-service store should rely more on the "frequency cue," while the low-quality store should rely more on the "magnitude cue." We provide empirical support for the key predictions of our analytical model by collecting and analyzing retail promotional advertisements for stores that vary in their level of in-store service, published in major newspapers in a large U.S. metropolitan city. We collected data from 813 advertisements across 14 different product groups in the men's and women's categories. The data are consistent with the model's predictions. Our theory and empirical analysis should be of interest to both academics and practitioners, particularly those in the area of channel management and promotional advertising.


Related Articles

  • Consumer Insights.  // Display & Design Ideas;Mar2009, Vol. 21 Issue 3, p22 

    The article presents information on the findings of several consumer surveys. According to a Nielsen Homescan online survey, nearly three-quarters of consumers believe private-label products are good alternatives to name brands. A survey commissioned by Yahoo! Inc. reports that 77% of consumers...

  • BMI INDIA RETAIL REPORT.  // India Retail Report;2013 3rd Quarter, Vol. 4 Issue 3, p1 

    The article presents retail industry report of India as well as economic forecasting of the industry for the next five years. It also discusses the growth and risk management strategies being employed by the leading players in the Indian retail sector. It is informed that per capita consumer...

  • Holiday Retail Sales Outlook Upbeat, But Not Without Reservations.  // Grand Rapids Business Journal;11/4/2002, Vol. 20 Issue 43, p6 

    Reports on Bank One chief economist Diane Swonk's outlook for retail sales in November and December 2002. Predicted rise in sales over the same period in 2001; Forecast for general merchandise and apparel store sales; Shift in consumer focus away from vehicle and household furnishing purchases;...

  • Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions. Zhu Wang; Wolman, Alexander L. // Working Papers Series (Federal Reserve Bank of Richmond);Apr2014, Vol. 14 Issue 9, preceding p1 

    This paper uses transaction level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify...


    The article examines the economic condition of retail industry in Great Britain in 2008. It is evident that consumer behavior has changed tremendously as they try to cope with the struggling economy. Change in consumerism offer retail trade a more challenging situation of coping with the demands...

  • FMCG-Branche gibt sich zuversichtlich.  // Lebensmittel Zeitung;1/3/2014, Issue 1, p22 

    The article forecasts the consumption, salary expectations, and consumer behavior for the German retail industry for 2014 according to a market study by the research company Deloitte.

  • Retail by the Numbers. Stephens, Craig // License!;Jun2004, Vol. 7 Issue 5, p44 

    Presents analyses of trends in the retail trade in North America. Unpredictable character of the sector; Sales improvements in 2003 and the first quarter of 2004; Clothing and accessories store sales; Consumer spending; Expected continued growth of the mass channel; Kmart shoppers; Common...

  • Ho-Ho-Holding The Line. Zwieback, Elliot; Springer, Jon; Hamstra, Mark // SN: Supermarket News;11/23/2009, Vol. 57 Issue 47, p14 

    The article presents information on the prospects of the retail industry during the 2009 holiday season. Analysts are forecasting consumer spending to be about even with year-ago levels perhaps up by 1% or so. Steven Wieting, an economist for Citigroup, said that he expects competition to be...

  • 2004's Retail Surprise? Economic Outlook Rosy But It Might Not Last. Young, Vicki M. // WWD: Women's Wear Daily;12/8/2003, Vol. 186 Issue 118, p1 

    Reports on the economic forecast for the U.S. economy, focusing on retail trade as of December 8, 2003. Expected solid holiday sales and positive impact of election-year politics; Reasons why analysts and economists do not see a long-term growth for the economy; Non-progress seen in employment...


Read the Article


Sign out of this library

Other Topics