Working Paper Series MK

Marketing

Flexible Decomposition of Sales Promotion Effects

Using Store-Level Scanner Data

Harald J. van Heerde, Tilburg University

Peter S.H. Leeflang, University of Groningen
Dick R. Wittink, Yale School of Management

Working Paper # 02

Dec 2000

This paper can be downloaded without charge from the Social

Science Research Network Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=271292
 Flexible Decomposition of Sales Promotion Effects
Using Store-Level Scanner Data

Harald J. van Heerde, Peter S.H. Leeflang, and Dick R. Wittink*

December 15, 2000

Harald J. van Heerde is Assistant Professor at the Department of Marketing, Faculty of

Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands.
Peter S.H. Leeflang is Professor of Marketing at the Department of Marketing and
Marketing Research, Faculty of Economics, University of Groningen, The Netherlands.
Dick R. Wittink is the General George Rogers Clark Professor of Management and
Marketing at the Yale School of Management, New Haven, CT, and Professor of
Marketing and Marketing Research, Faculty of Economics, University of Groningen. The
first author can be contacted by telephone (+31 13 466 3424), fax (+31 13 466 2875), or
by email: heerde@kub.nl). All authors thank ACNielsen (USA and The Netherlands)
for providing the data, and seminar participants at the universities of Tilburg, Leuven, and
Rotterdam (Erasmus) for valuable feedback.

1
 Flexible Decomposition of Sales Promotion Effects
Using Store-Level Scanner Data

Abstract

Recent studies in marketing show decompositions of sales promotion effects based on

household-level scanner data. Typically, the total elasticity is decomposed into choice,

timing, and quantity elasticities. We propose a model that estimates standard, enhanced, and

flexible decompositions based on store-level data. The standard decomposition divides the

own-brand sales elasticity into a market share (choice) elasticity, a period share (timing)

elasticity, and a category sales (quantity) elasticity. The enhanced decomposition includes

two extensions. One extension is the separation of the category sales elasticity into a

between-store share and a total market elasticity, which allows us to measure cross-store

effects of promotions. The other extension is a partition of the market share elasticity into

within-brand and between-brand share elasticities. We show that the store-level results for

standard decompositions based on four product categories are comparable to extant

household-level results. For the two extensions, our empirical results, for one product

category each, show small between-store share elasticities but large cannibalization effects

between SKUs of the same brand.

For improved understanding of promotion effects, we propose flexible decompositions.

One is that we allow the decomposition to depend on the type of promotion support, such as

feature and/or display. We find that the own-brand sales elasticity increases with more

support. Also, for more support, the relative contribution of the period share elasticity

increases while the contribution of the market share elasticity decreases. The second type of

flexibility is that we allow the decomposition to depend on the magnitude of the discount. We

use a flexible, nonparametric, method to account for the latter dependency. We find that with

display and/or feature, the own-brand sales elasticities are less negative at higher price

discount levels. The decomposition shows that on average, the market share elasticity rapidly
becomes less negative while the period share- and the category sales elasticities are fairly

constant when the discount increases. Hence, the relative contribution of the latter two

elasticities increases at the cost of the relative contribution of the market share elasticity. The

flexible estimation of promotion effects, separately for four types of support, provides

superior insight into marketplace phenomena relevant to marketing scientists and marketing

practitioners.

Keywords: Econometric Modeling, Nonparametric Estimation, Price Elasticity, Promotion,

Regression and Other Statistical Techniques.

 1. INTRODUCTION
Given the important role of temporary price cuts and other promotions in the marketing mix

of American and European firms, it is critical that marketing managers and academics have a

detailed understanding of the effects of promotions. It is well known that promotions often

result in large sales effects for a promoted item. However, this does not mean that the sales

increase is truly beneficial. To determine that, we need a model of sales which incorporates

the relevant sources of sales increases. These sources differ in attractiveness to the

manufacturer and retailer. For example, at the store level the sales increase for a promoted

brand could come from other brands (brand switching), from the same brand in other time

periods (stockpiling), from brands in other product categories (category expansion), and from

the same or other brands in other stores (store switching). Given the multitude of sources, it is

easy to see that the benefit of a sales increase is not the same for manufacturer and retailer.

For example, the retailer does not benefit from brand switching within the store, except for

differences in margins. Brand switching within the store is particularly relevant to

manufacturers. However, neither retailers nor manufacturers derive benefit from sales

borrowed from other time periods, unless, say, higher inventories increase consumption

levels. Thus, it matters greatly what the sources of sales effects are.

Several researchers have decomposed promotion effects using household-level

scanner data. They address important aspects, including differences in the nature of

decomposition between categories. We address complementary issues that deserve attention

both from scientific and managerial perspectives. Managers often rely on store data, and they

need the means to decompose sales promotion effects. Therefore, we propose a store-level

decomposition method that is surprisingly simple to implement. It yields a decomposition of

the own-brand sales elasticity into a market share elasticity, a timing-related (period share)

elasticity, and a quantity-related (category sales) elasticity. The timing effects include both
postpromotion effects due to stockpiling and prepromotion effects which may result from

anticipatory responses.

We also show how the category sales elasticity can be decomposed into a between-

store share elasticity and a total market elasticity. The market share elasticity can be

decomposed further into a within-brand and a between-brand share elasticity. This partition

allows manufacturers to distinguish between cannibalization and brand switching.

Empirically, we allow the decomposition to depend on the support type by including a

separate variable for each of four support conditions. In addition, we allow the decomposition

to depend on the magnitude of the price discount by using a nonparametric technique (local

polynomial regression) that provides direct estimates of the relevant elasticities. We apply

these methods to four store-level scanner data sets.

To summarize, our approach includes the following important elements:

1. We use store-level scanner data instead of household-level data to obtain a decomposition

of the own-brand sales elasticity into market share, period share, and category sales

elasticities. We allow for sales effects that are borrowed from the future and from the

past. This approach is applicable to data on brands.

2. We further decompose the category sales elasticity into between-store share and total

market elasticities. This approach is applicable if data exist on category sales in stores

belonging to multiple chains that may compete within a geographic area.

3. We further decompose the market share elasticity into a within-brand and a between-

brand share elasticity. This approach is applicable for data on SKUs.

4. We allow the decomposition to depend on the type of support offered for a temporary

price discount.

5. We let the decomposition depend on the magnitude of the price discount by estimating

the elasticities nonparametrically.

 This paper is organized as follows. In section 2 we review the literature on the

decomposition of sales promotion effects at the household level, and we discuss why

managers need decomposition models based on store-level data. In section 3 we propose our

store-level model, and describe how it provides the desired decomposition. We discuss the

data in section 4, we provide empirical results for four product categories in section 5, and we

present our conclusions in section 6.

2. REVIEW OF HOUSEHOLD LEVEL STUDIES

2.1. Approaches and results

There are five major studies of promotion effect decompositions based on household

panel data: Gupta (1988), Chiang (1991), Chintagunta (1993), Bucklin, Gupta, and Siddarth

(1998), and Bell, Chiang, and Padmanabhan (1999). Guptas paper (1988) is a seminal

contribution to sales promotion research. His research provides the first decomposition of the

effects of promotions on when, what, and how much households buy (with data from the

coffee category). He uses a separate model for each of the three components. The key

equation underlying his, and other decomposition studies, is, using Guptas notation:
(1) Q j p j pt Q ,

where:

Qj = sales of brand j in time interval 0t;

pj = brand js choice probability (conditional on purchase);

pt = probability of product purchase in time 0t (i.e., purchase incidence

probability);

Q = product category sales.

If Dj is the level of dealing for brand j during time period (0 t), the deal elasticity is

given by the chain rule for the product of functions:

 Q j D j p j D j p D j Q D j
j t
,
D j Q j D j p j D j pt D j Q

or,
(2) j BC ( j ) PT Q ,

where:

j = elasticity of brand j (with respect to deal);

BC ( j ) = brand choice elasticity for brand j;

PT = purchase timing elasticity with respect to deal of brand j;

Q = quantity elasticity with respect to deal of brand j.

Gupta (1988) finds that on average, across coffee brands and promotion types, brand

choice accounts for 84 percent of the own-brand elasticity, and shorter interpurchase time

represents about 14 percent of the own-brand elasticity. Stockpiling is a negligible

phenomenon, accounting for about 2 percent of the own-brand elasticity (see also Table 1).

[Insert Table 1 about here]

Chiang (1991) posed a slightly different question: what are the effects of promotion

1
on whether (i.e., purchase incidence), what and how much to buy, based on a simultaneous

equation model. Despite differences in model specification and estimation, Chiangs

decomposition percentages (also for coffee, see Table 1) are very similar to the ones found by

Gupta (1988). However, Chintagunta (1993) obtains a decomposition that differs

dramatically from Gupta and Chiang. This difference is at least in part due to differences in

product category characteristics. Bucklin, Gupta, and Siddarth (1998) allow for heterogeneity

between (latent) segments but their one-segment results are quite similar to Chintaguntas.

Both studies show a decomposition for yogurt (see Table 1).

Bell, Chiang, and Padmanabhan (1999) provide an empirical generalization of the

decomposition of promotional response. Based on a similar model as Chiang (1991), they

obtain results for 173 brands across thirteen different product categories. They regress brand-

specific decomposition elasticities on category characteristics, brand factors and consumer

characteristics. They find that these factors explain a substantial amount of the variance in the

three components of promotional response for a brand. For example, storability of a product

category is related to purchase acceleration effects (incidence and quantity).

We focus our review on the average effects by category, and summarize the

decomposition results from the five studies in Table 1. Across all categories, the brand-

switching component is by far the largest (74 percent), followed by purchase quantity (15

percent), and purchase timing (11 percent). However, the percentages differ substantially

across categories. For example, categories for which household inventories tend to be

modest, such as margarine and ice cream, show relatively small purchase quantity

percentages. For more detail on reasons for differences across categories and brands, see Bell,

Chiang, and Padmanabhan (1999).

3. STORE-LEVEL APPROACH FOR DECOMPOSITION

We first present a standard decomposition, which is closely related to the decomposition

used in household-level studies. In sections 3.2 and 3.3 we introduce two extensions of the

standard approach. In section 3.4 we define the variables in a manner that allows the

decomposition to depend on the support type. We discuss estimation methods for constant

and varying decompositions in section 3.5. In sections 3.6 and 3.7 we discuss tests of

nonlinearity and dynamics.

3.1. Standard decomposition

We propose a store-level approach to decompose the effects of sales promotions based on the

premises of Gupta (1988). In theory, household data provide the best opportunities for

decomposition. However, store-level data are far more likely to be used by managers for

decisions about promotions (Bucklin and Gupta 1999). Store data are also more
representative, and more appropriate for low-incidence product categories. It is critical,

therefore, to also have methods suitable for the decomposition of sales effects based on store-

level data. To accomplish this, recall that brand sales in a given store is the product of three

quantities:
(3) Q jt ms jt ps t Qt ,

where:
Q jt = sales of brand j in week t;
ms jt = market share of brand j in week t;
pst = period share = share of category sales in week t ( Qt ) out of category sales ( Q )

in weeks t T through t T ;

Qt = category sales in weeks t T through t T .

In words, starting from the end of equation (3), Qt represents category sales in multiple

periods surrounding t. Part of this amount is sold in period t, and this is represented by pst .
Category sales in t equals pst Qt . A fraction of this is for brand j, and this fraction
is

represented by ms jt .

By taking the derivative of (3) with respect to sales promotion variable Dj, and
multiplying by D jt / Q jt , we obtain:

Q jt D jt ms jt D jt pst D jt Qt D jt
Q , j ,
D jt Q jt D jt ms jt D jt ps t D jt Qt

or,
(4) Q , j ms , j ps Q ,

where:
Q , j = own-brand sales elasticity for brand j;
ms , = market share elasticity of brand j;
j

ps = period share elasticity;

Q = category sales elasticity.

The standard decomposition in (4) can be extended in two ways. We decompose the
category sales elasticity into a between-store share and a total market elasticity in section 3.2.

Independent of this extension, we decompose the market share elasticity into a within-brand

and a between-brand elasticity in section 3.3.

3.2. Extended decomposition of the category sales elasticity

The category sales elasticity may include sales that are borrowed from other stores: cross-

store effects. With data on sales by stores belonging to different chains, we can extend the

decomposition of (4) and disentangle the category sales elasticity into a between-store share

elasticity and a total market elasticity. Formally, brand sales is:

Q jt ms jt pst bss t QM t ,

where:
bsst = between-store share = ratio of Qt to QM t ;

QM t = total market sales in weeks t T through t T in focal store and its

competitor stores from other chains (the market),

and the other elements are defined before. Then the own-brand sales elasticity is:
(5) Q , j ms , j ps bss QM ,

where:
bss = between-store share elasticity;

QM = total market sales elasticity;

Q , j , ms , j , ps are as defined before.

 3.3. Extended decomposition of the market share elasticity
Extant household-level decomposition research does not distinguish between market

share effects within brands (cannibalization) and market share effects between brands

(competition). Our approach estimates these effects based on SKU-level data. We define

SKU k from brand j, to distinguish between market share effects that involve SKUs of the

same brand and SKUs of other brands. Note that we can write the sales of SKU k as:
Qkt wbs kt bbs jt pst Qt ,

where:
Qkt = sales of SKU k in week t;

wbs kt = within-brand share of SKU k in week t;

bbs jt = between-brand share in week t of the brand j to which SKU k belongs;

and the other elements are as defined before. Now the own-SKU sales elasticity is:
(6) Qsku,k wbs ,k bbs , j ps Q
,
where:
sku
Q ,k = own-SKU sales elasticity for SKU k;
wbs = within-brand share elasticity for brand k;
,k

bbs , j = between-brand share elasticity for brand j to which SKU k belongs;

and the other elements are as defined before.

3.4. Variable definitions to allow the decomposition to depend on sales promotion type
Typical sales promotions consist of temporary price discounts which may be

communicated to consumers by feature advertising and/or displays or not at all. We allow the

magnitudes of decomposition sources to depend on the type of communication or support for

a price discount. In this respect we follow Van Heerde, Leeflang, and Wittink (2000) who

find that the sales displacement effect of price discounts differs greatly between support

types. It also seems plausible that promotions which are minimally communicated within a
store primarily affect the brand choice decision. Thus, unsupported price cut elasticities may

consist primarily of market share elasticities. Discounted items with more support (feature,

display) may enhance category sales, thus decreasing the relative contribution of the market

share elasticity.

Extant decomposition research rarely focuses on differences between sales promotion

types. When it does, the variables (Gupta (1988): feature-and-display, feature-or-display, and

price cut; Chiang (1991): feature, display) are highly correlated because they are often used

simultaneously in practice. We propose a set of variables that is by definition uncorrelated,

and which has a managerially relevant interpretation. That is, our perspective is that

promotions have a price reduction as their core, and a communication device that is feature-

only, display-only, feature and display, or neither. Thus, we define four price variables for

each brand: deal without support, deal with feature-only support, deal with display-only

support, and deal with feature-and-display support.

To eliminate the influence of regular price effects, we use a price index variable (actual

over regular price). With the four price index variables, we obtain a separate decomposition

of own-brand sales elasticities for each of the four different support types. In the results

section, we use a pooling test to determine whether it is appropriate to postulate one common

model (i.e., with one common elasticity across the support types) or whether it is meaningful

to allow for separate decompositions for the four different price promotion conditions.

3.5. Estimation methods for constant and non-constant decompositions

Since extant decomposition research assumes constant decomposition elasticities, we first

introduce a method to do the same. We then relax this constraint and allow the decomposition

elasticities to depend on the magnitude of the price discount.

 It is well known that the parameters of a log-log model are constant elasticities. By

using the relevant variables, we can obtain all decomposition elasticities. For the basic

decomposition (4), we proceed as follows:

Q (brand),l from ln(Qijt ) 4 Q (brand ),l ln(PI ijt )Dlijt K
k X ijkt u ijt ,
(7)
: l 1 k 1

ms ,l from ln(msijt ) 4
ms ,l ln(PI ijt )Dlijt K
k X ijkt uijt ,
(8)
: l 1 k 1

ps ,l from ln( psit ) 4

ps ,l ln(PI ijt )Dlijt K
k X ijkt ui jt ,
(9)
: l 1 k 1

Q ,l from ln(Qit ) 4
Q ,l ln(PI ijt )Dlijt K
k X ijkt ui jt ,
(10)
: l 1 k 1

where:
Qijt = sales of brand j in store i in week t;

ln(PI ijt ) = log price index for brand j in store i in week t;

Dlijt = indicator variable for no support (l = 1), feature-only support (l = 2),

display-only support (l = 3), and feature-and-display support (l = 4);

X ijkt = covariate k for store i, brand j, week t, including other own-brand

instruments, cross-brand instruments, brand dummies, store dummies,

and week dummies;
= disturbance terms for brand j in store i in week t in respectively
uijt , uijt , uijt ,
uijt equations (7)-(10);
k , k , k, k = response parameter for covariate k in respectively equations (7)-(10);

and
J
Qijt
Qijt 2 ps
j 1
; Q Q .
ms ;
ijt J it t T J it ijs
s t T j 1
Qijt Qijs
j 1 s t T j 1

To obtain the decomposition proposed in (5), we replace the category sales by the between-

store share (bss) and the total market sales in the focal and competitor stores (QM):

t T
J
t T J
Qijs
 s t T j 1
bss ijt t T J
; QM it Qijs ,
iCi s t T j 1
Qijs
i Ci s t T j 1

where C i is the set consisting of store i and its competitor stores.

To obtain the decomposition proposed in (6), we replace the market share by within-

brand (wbs) and between-brand share (bbs). The criterion variable for the within-brand share
Qikt and for the between-brand share equation it is:
equation is: wbsikt ,
Qik t
k brand j

Qik t
The predictor variables are the same as before, except they are defined at
bbs ijt
k brand j .
J

Qijt
j 1

the SKU level.

We estimate the equations by OLS and pooled across brands/SKUs within categories.

The rationale for pooling, instead of estimation for each item separately, is that the goal of

our research is not to explore differences between brands. Our approach is in line with

previous household-level studies (except for Bell, Chiang, and Padmanabhan 1999), which

also present common decomposition results for the items. Since we explore differences

between support types and price discount levels, we omit subscripts for item j from the

elasticities in equations (7)-(10). We note that equations (9) and (10) are also estimated

across brands, although these equations have the same criterion variable for each brand. But,

since they have brand-specific predictor variables, we do pooled estimation.

Note that although the errors from the four equations (7)-(10) may be correlated,

estimation by SUR would yield the same parameter estimates since each equation contains

the same predictor variables (Judge et al. 1985, p. 468). We also note that the own-brand

sales elasticity estimate equals the sum of the estimates of the market share elasticity, the
period share elasticity, and the category sales elasticity (as in (4)) even if it is estimated

independently. The same holds for the extended decompositions (5) and (6).

We emphasize that these models do not suffer from aggregation bias. For example,

one of the regressions we undertake is log category sales on log price index. This aggregation

is restricted to the criterion variable (category sales is the sum of sales for the brands in a time

window), and therefore it does not create the aggregation bias identified in Christen et al.

(1997). Our measure captures what it should: the category sales elasticity with respect to

price index.

The assumption in the literature is that the decomposition elasticities are the same

across all price discount magnitudes. This is not valid if the relative sizes of the

decomposition sources depend on the magnitude of the price discount. For example, Van

Heerde, Leeflang, and Wittink (2001) find that the nature of own- and cross-brand effects of

a promotion depend on the size of the discount. Analogously, we propose that the size of each

decomposition source depends on the magnitude of a price discount. For example,

households may only be willing to accelerate purchases if the price reduction exceeds

transportation- and holding costs of increased inventory. In that case, sales displacement

effects occur only for price discounts that are sufficiently high. Thus, while previous research

does not allow decomposition percentages to differ across discount levels, we relax this

constraint.

To allow for varying elasticities we use a simple idea. For a log-log model the
elasticity is:
y p ln( y )
.
p y ln( p)

Instead of forcing it to be constant, we estimate this derivative flexibly with nonparametric

regression techniques. Specifically, if we define plijt as one of the four price index variables,

plijt PI ijt Dlijt for l =1, 2, 3, or 4, we estimate the elasticities in (4) for a specific price index
level ( p 0 ) as:

ln( Qijt )
q ,l ( p0 )
= plijt p0 ;
ln( p ) lijt

ln( msijt
)
ms ,l ( p0 = plijt p0 ;
) ln( p )
lijt

ln(; ps )
it

ps ,l ( p0 = plijt p0
) ln( p )
lijt

Q ,l ( p0 = ln(Q ) p p
lijt 0
) ln( p )
lijt

While estimating these derivatives we control for other covariates, i.e., the X ijkt s in (7)-(10).

The within-brand and between-brand share elasticities required for (5) as well as the

between-store share and the total market elasticities required for (6) are obtained analogously.

The nonparametric technique we use is local polynomial regression (Fan 1992). We use

this method because it is free from boundary problems, it is design-adaptive, and it is easy to

implement (see Fan and Gijbels 1996, section 3.1 or the Appendix for details). An alternative

method to accommodate nonlinear effects is (global) polynomial regression. It would

require the addition of squares or higher-order powers of the predictors in the regression

equations (7)-(10). Fan and Gijbels (1996) argue against this method even though it has been

widely used. Among its drawbacks are that polynomial functions are not flexible, that

individual observations can have a large influence on remote parts of a curve, and that the

polynomial degree cannot be controlled continuously (i.e., it is restricted to whole numbers).

In addition, the polynomial terms can be highly correlated, especially when many powers are

needed. Fan and Gijbels (1996) argue that local polynomial regression provides the desired

flexibility and it overcomes the drawbacks associated with global polynomial modeling.
 3.6. Test for nonlinearity
Before we apply the nonparametric analyses, we use the RESET test for the assumption of

constant (decomposition) elasticities (Stewart 1991, pp. 71-72). It is a general procedure,

designed to detect the choice of an inappropriate functional form. The argument is that if the

functional form is not consistent with the data, one might expect the square or some higher

power of one or more of the predictors to improve the explanation of the criterion variable. In

practice, one may not have a very clear idea as to which powers of a predictor are most

relevant. To avoid working with an arbitrary selection of terms, RESET tests the significance

of the square of the estimated criterion variable as an additional variable. Thus, the RESET

test requires that we: (1) regress ln y on all predictors, and (2) regress ln y on the same
predictors augmented with the square of the estimated criterion variable, i.e., (ln y) 2 .
The

RESET test is the two-sided t-test of the parameter estimate for the latter predictor.

3.7. Determination of the time window for dynamic promotion effects

We now consider how to specify T for postpromotion and T for prepromotion effects. This

time window should be large enough so it includes all possible dynamic effects of

promotions. However, if the window is excessively large, our estimates may cause the

category sales elasticity to be biased upward (it becomes less negative) and the period share

elasticity to be biased downward (it becomes more negative). Specifically, suppose the

correct time window is (T+ T +1) weeks (the 1 represents the focal week), but
we
incorrectly choose a larger window, (T1+ T1 +1) weeks, with T1>T and T1 > T . Total

category sales in the correct window is Q, while in the larger window it is Q1 (but
Q1 Q 3 to Dj is closer to zero than the elasticity of Q to Dj,
). Then the elasticity of Q 1
D j D j
Q1 D j Q D j Q Q Q . p , where p < 1. In addition, since the sum of
since
Q

Q1
D j Q1 D j Q Q1 Q1
the period share elasticity and the total category sales elasticity is the same for both time
Q Q , so that
windows, we have ps 1 Q
Q ps1 ps1 Q1

Q ps .
ps (1 )
1 ps
Q
Q1

Thus, it is important to choose the time window so as to just include all dynamic effects.

Based on Van Heerde, Leeflang, and Wittink (2000) we apply a time window of

t6,..,t,,t+6 (T = T = 6). We also examine the sensitivity of results to alternative time

windows.

4. DATA
We apply the models to two American (tuna, tissue) and two Dutch (shampoo, peanut butter)

weekly store-level scanner data sets. We summarize the data in Table 2. All data sets, except

for tissue, are from stores belonging to a single chain. Tissue has the smallest sample size and

also the smallest number of price discount observations. The percent of observations with

price discount is higher in the American than in the Dutch data sets, varying from more than

30 percent for tuna to less than 10 percent for peanut butter.

[Insert Table 2 about here]

The first American data set, from AC Nielsen, contains five national brands in the 6.5

oz. canned tuna fish product category. We have 104 weeks of data for each of the 28 stores of

one supermarket chain in a metropolitan area. Due to the computation of category sales

across weeks t6,,t+6, we loose the first and last six observations for each store. Therefore,

the effective sample size for each item is 291228*12=2576. In this sample, brands 2-5 used

price promotions actively while brand 1 did not at all. Therefore, for estimation we exclude

the data for brand 1, and have 4*2576 = 10,304 observations. The tuna data set is the only

data set for which we can use the extended decomposition of the category sales elasticity into
a between-store share elasticity and a total market elasticity, as in (5), since we have data on

the sales of competitor stores.

The second data set (52 weeks) pertains to the six largest national brands in the toilet

tissue product category in the USA. The data (also from AC Nielsen) are from 24 widely

dispersed stores located in the eastern US. We show descriptive statistics based on a net

sample size of 960 observations for each of the toilet tissue brands in Table 2. All brands use

price promotions so the pooled estimation sample size is 6*960 = 5,760.

The first Dutch data set (from AC Nielsen) consists of eleven shampoo brands, of which

the five largest frequently engaged in promotional activities. For this product category we

have 109 weekly observations for almost all 48 stores in a national sample from one large

supermarket chain. After deleting the first and last six weeks for each store we have 4,619

observations for each of the five active (and largest) brands, and 23,095 for pooled

estimation.

The second Dutch data set (AC Nielsen) is on twelve items of peanut butter (Table 2). In

contrast to the other three data sets, this data set is at the SKU level which enables us to

estimate both within-brand and between-brand share elasticities, as in (6). Five SKUs used

price promotions. For this product category we have 144 weekly observations for almost all

49 stores in a national sample from one large supermarket chain. With a net sample size of

6,179 observations per brand, we have a pooled sample of 30,895 observations.

5. RESULTS
We obtain results through a series of model estimation and validation steps. We first estimate

both common and idiosyncratic own-brand sales elasticities for the four support types to test

for homogeneity. We show the results of the pooling tests in section 5.1. The results show

that the elasticities differ systematically across the four supports. In section 5.2 we show that

the nature of the decomposition also differs. We present the standard decompositions, and,
where appropriate, the extended decompositions from equation (5) and (6). In section 5.3

we discuss the sensitivity of results to the choice of the time window. In section 5.4 we

present evidence in favor of flexible decompositions based on RESET test results. Given the

rejection of the null hypothesis of constant elasticities, we show nonconstant elasticity results,

based on local polynomial regression, in section 5.5.

5.1. Pooling tests

For each category, we test whether we can assume one common own-brand sales elasticity

for each of the four different support conditions. We show in Table 3 that the homogeneity

assumption is rejected in all cases. For every product category the estimated own-brand sales

elasticity is closest to zero when there is no support and farthest from zero with feature and

display. Hence we proceed by allowing for separate elasticities for the different support

conditions.

[Insert Table 3 about here]

5.2. Constant decomposition

We show the standard decomposition of the own-brand sales elasticity into constant market

share, period share, and category sales elasticities in Table 4. The standard decomposition

forces the elasticities to be the same for different price levels. The vast majority (61 of 64) of

the estimated elasticities are significant (p<0.05) and all but one are negative, as expected.

The significantly positive elasticity is the category sales elasticity for tissue for price cuts

without support.

[Insert Table 4 about here]

The first column in Table 4 replicates the own-brand sales elasticities of Table 3. The

next columns show that the magnitude of the market share elasticity is typically large while

the magnitudes of the other two elasticities tend to be small. Across the four categories and

across support types, the average own-brand sales elasticity is 3.99. The market share
elasticity is 3.46, the period share elasticity is 0.48, and the category sales elasticity is only

0.05.

We show the percentage results for the standard decomposition in Table 5. The results

are remarkably consistent with the results from household-level data (Table 1). Based on the

average decomposition figures across categories (last row of Table 5), the market share

elasticity accounts for 87 percent of the own-brand sales elasticity, the timing component for

12 percent, and the quantity component for 1 percent. The most notable difference is that our

category sales elasticities tend to be lower than the corresponding results in household-level

research. This may be due to the fact that we use a longer time horizon to compute category

sales than household-level studies use. As a consequence, total category sales are higher

and the corresponding elasticity is lower.

[Insert Table 5 about here]

The results in Tables 4 and 5 also show how the decomposition varies across the

support types. Recall that the pattern in the own-brand sales elasticities is as expected:

smallest (least negative) elasticities for unsupported price discounts, and largest for feature-

and-display supported price discounts (see last panel of Table 4). We expect the relative

contribution of the market share elasticity to decrease as the total elasticity increases. The

differences in the average decomposition percentages across the support types are notable.

The averages across the categories show that with more support, the percent of the own-brand

sales elasticity attributable to market share decreases while the period share and category

sales elasticities both increase. Thus, the stronger the support, the stronger the effect on the

timing and quantity decision, and the weaker the effect on the choice decision, in a relative

sense. However, in an absolute sense, both the market share and the period share elasticities

become more negative for stronger support types (see Table 4).

We observe in Tables 4 and 5 modest differences between categories. Most notably,

the US data sets (tuna and tissue) show, relative to the two Dutch data sets (shampoo and
peanut butter), stronger own-brand sales elasticities (see Table 4). One possible explanation is

that American consumers are more used to price promotions and react more strongly than

Dutch consumers. In addition, variation in the relative contributions of the three components

is stronger for the US data than for the Dutch data (see Table 5). This lends support to the

idea that American consumers have adapted their response behavior to support types to a

greater extent than Dutch consumers have.

We further decompose the category sales elasticity for tuna into a between-store share

elasticity (= 0.02) and a total market elasticity (= 0.07) (see the columns headed by

Extended decomposition in Tables 4 and 5). These results suggest that the negative cross-

store effects are very small for tuna. The elasticities for the support types show that the

significantly negative cross-store effects are associated with unsupported price cuts and with

display-only supported price cuts. The finding that cross-store effects occur only for

promotions without feature ads, may seem counterintuitive. A tentative explanation is the

following. For big ticket items, such as disposable diapers, consumers use feature ads to

decide where to purchase (Kumar and Leone 1988). This is referred to as direct store

switching (Bucklin and Lattin 1992). Such big ticket items may cause households to purchase

other goods at the outlet perceived to have the best prices on specific big ticket items. For

small ticket items such as tuna, households may not scan the ads to see which store to visit.

Hence direct store switching for tuna is unlikely. But for households who distribute their

purchases over multiple stores, or who switch stores over time, displays alert them to the

possibility that small ticket items are on sale. In addition, they may habitually check the

shelves for price reductions which may result in indirect store switching (Bucklin and Lattin

1992). A very modest amount of indirect store switching for discounts without support and

with display is consistent with our findings for tuna. This research hypothesis needs to be

tested, however, with household data.

 For the peanut butter data set we decompose the market share elasticity into a within-

brand and a between-brand share elasticity. We find that, on average, the market share

elasticity is mostly explained by the within-brand share elasticity. Thus, cannibalization

appears to be quite substantial. Interestingly, cannibalization also tends to decrease, in a

relative sense, with more support, but in an absolute sense it increases (Table 4).

5.3. Sensitivity to varying time window

We now consider the sensitivity of the results to different time windows. Our default

choice is t6,...,t+6, where t is the promotional week. We use the following alternatives:

t3,...,t+3 (smaller pre- and postpromotion periods), and t,..,t+6 (postpromotion period only).

The substantive results are quite robust with regard to the time window choice. Variation in

market share elasticities is by definition due to sample size and composition differences

between three time windows. That is, for the default time window t6,...,t+6 we loose the

first six and last six weeks for each store, for t3,..,t+3 we loose only the first and last three

weeks, and we loose the last six weeks per store for t,...,t+6.

Variation in the period share and category sales elasticities is not only due to data set

differences, but also due to different definitions of period shares and total category sales. For

three of the four data sets we find that for a smaller time window (both alternatives) the

period share elasticity decreases and the category sales elasticity increases. Nevertheless, the

results are very stable: the category sales elasticity varies at most by 3 percentage points

while the period share elasticity varies no more than 5 percentage points. Given that part of

this variation is due to sample size and composition differences, it is useful to note that the

market share elasticity also varies as much as 3 percentage points. All these maxima occur for

tuna. Across the other three categories, the maximum variation is 2 percentage points for both

period share and category sales elasticities and 2 percentage points for market share elasticity.

Hence we conclude that the decomposition is not very sensitive to the choice of time window.
 5.4. RESET test for constant elasticities
We use the RESET test for the initial assumption of constant elasticities. To maximize the

comparability across categories we focus on the standard decomposition elasticities. We

compute RESET test-based p-values for each of the four data sets, separately for each of the

four standard elasticity types. The results show that 15 out of 16 p-values are below 0.01. We

conclude that there is sufficient reason to proceed by allowing for a flexible decomposition of

the own-brand sales elasticity.

5.5 Flexible decomposition

We estimate each of the four elasticities flexibly by local polynomial regression. We do this

by allowing one predictor (one of the four price index variables) to have flexible effects in

(7)-(10), whereas all other predictors have constant effects. The amount of variability in local

polynomial regression is determined by the bandwidth parameter, which reflects a tradeoff

between bias and variance. With a very large bandwidth parameter, local polynomial

regression is equivalent to estimating a regular global polynomial regression model. For

example, with a polynomial of degree two, it is a global parabolic relationship (in logs). The

bias of this approach may be very large, but the variance is small. If the bandwidth parameter

is small, there can be much variation in the response estimate. Now the bias is very small, but

the variance is high. Also, with very small bandwidth values it is possible that local

polynomial regression breaks down due to singularity. This is the case for sparse areas of the

price discount range, i.e., for the highest price discounts. We apply the following set of rules

for the bandwidth choice:

we choose a bandwidth small enough to have a small bias but large enough so that

inconceivable output due to noise, such as positive elasticities or nonmonotonic patterns

in the elasticities, is rare;

 for each instrument, we use one common bandwidth parameter for each of the elasticities;

this choice ensures that the sum of the components of the total elasticity equals the total

elasticity;

we use the same bandwidth parameter for each of the four instruments; this choice

ensures that the results for the four instruments are maximally comparable;

for each category, we use the same bandwidth to enhance the comparability.
4
Using these rules, our choice is: h = 0.6 for all categories. This value allows us to estimate

reliable elasticities for price indices in the range 0.70-1.00. We show flexible decomposition

graphs in Figures 1-4.

[Insert Figures 1-4 about here]

From Figures 1-4 we conclude the following:

For unsupported price discounts, the elasticities tend not to vary much across the price

index values. The observable variation occurs in the market share elasticities.

For supported price discounts, for all categories, the own-brand sales elasticity becomes

5
strongly less negative for larger price discounts. For a number of cases (especially for

tissue and shampoo), the effects are so strong that the own-brand sales elasticity is

reduced by a factor of ten when the price index goes from 1.00 to 0.70. This might mean

that the signaling-function (Inman, McAlister, and Hoyer 1990) is strong: the support is

perceived as a signal for a price cut and households may purchase the product irrespective

of the actual discount level.

The main reason for the declining own-brand sales elasticity is a reduction in the market

share elasticity for all categories. These effects are strongest for feature and display

supported discounts, followed by display-only support, and feature-only support.

The period share elasticity and the category sales elasticity are relatively constant across

varying discount levels.

The between-category differences in the elasticity patterns are modest.

 We show in Table 6 the relative contributions of each of the three elasticity components

for varying price index levels averaged across all categories. The first column of this table

shows the price index level, the second column the own-brand sales elasticity, and columns

three to five the contributions of the market share elasticity, the period share elasticity, and

the category sales elasticity.

[Insert Table 6 about here]

We note that Table 6 contains negative percentages in two instances, reflecting some

model unreliability in the category sales elasticity estimates. We could suppress these

negative numbers by taking a larger bandwidth values for these elasticities, but we refrain

from doing this because of the rules set out in the beginning of this section.

From Table 6 we conclude the following:

In a relative sense, the contribution of the market share elasticity decreases for decreasing

price index levels, the period share elasticity contribution increases, and to a lesser extent,

the category sales elasticity contribution increases.

The aforementioned changes in the contributions increase in strength for increasing

support: weakest for discounts without support, strongest for discounts with feature and

display support.

6. CONCLUSIONS
Given the overwhelming use of sales promotions it is key to have a model to split their

effects into its constituent sources. Previous research, most notably Gupta (1988), provides

such a model and splits the total elasticity into choice, timing, and quantity elasticities. We

complement previous research with a new approach that yields additional insights. One of the

key benefits of this approach lies in its applicability to store-level data. Another benefit is its

simplicity, since it only requires a few simple variable transformations (such as computing

log sales, log market shares and log category sales over time, and creating log price indices

26
for the different support types), and a few OLS regressions. The key trick of this approach

is that by choosing the appropriate criterion variables, we can estimate the relevant elasticities

directly as response parameters associated with a single predictor variable, controlling for

other predictor variables. Hence we do not have to estimate models with many lead, lagged,

and competitive effects (as in Van Heerde, Leeflang, and Wittink 2000), and derive the

decomposition based on the aggregate of many response parameters, estimated with low

reliability in some instances. In addition, the decomposition method does not become more

complex for an increasing number of brands or SKUs in the analysis. That is, the number of

models to be estimated remains four for the standard decomposition of the own-brand sales

elasticity into its three components. And for more items in the analysis, the number of

predictor variables in the models does not increase.

Our standard approach very much resembles the decomposition by Gupta (1988) and

other household-level studies, and we obtain similar results. One extension is that our

approach allows the market share elasticity to be decomposed into within-brand share effects

(cannibalization) and between-brand share effects (competition) for SKU-level data. This

extension is especially relevant for manufacturers. Another extension is that we further

decompose the category sales elasticity into a between-store share elasticity and a total

market sales elasticity. This extension is most relevant for retailers.

We also study how the decomposition results are moderated by characteristics of the

price promotion. The dependence on the type of support is accomplished by a deliberate

choice of variable definitions, and the dependence on the discount level by local polynomial

regression. The varying elasticities allow a manager to assess the contributions of the market

share-, period share-, and category sales elasticities for each support type and at meaningful

price discount levels. The managerial implications of our findings are the following:

with more support for discounts, the own-brand sales elasticities become more negative.

This is due to increases in the absolute contributions of the market share elasticity, the
 period share elasticity, and the category sales elasticity. In a relative sense, however, the

period share elasticity, and to a lesser extent, the category sales elasticity, become more

important at the cost of the market share elasticity. Thus, more support leads to a shift of

a within-category zero-sum game to more intertemporal effects and some category

growth;

with higher discounts, the own-brand sales elasticity for unsupported price discounts is

fairly constant, whereas the own-brand sales elasticities for supported price discounts

become much less negative. Thus, although supported price discounts have very strong

initial marginal effects, their marginal effects at higher price discount levels are very

limited;

with higher discounts for supported price cuts, the absolute and relative contributions of

the market share elasticity decrease. One possible interpretation is that consumers tend to

switch at relatively low price discount levels, and that higher price discounts do not result

in much further switching;

with higher discounts for supported price cuts, the absolute contributions of the period

share elasticity and the category sales elasticity are fairly constant. Thus, the timing and

quantity decisions seem to be relatively independent of the discount level. Nevertheless,

in a relative sense we observe stronger contributions of the timing and quantity

elasticities.

We provide various validation checks of our approach. First, the face validity of our

results is high. We find decomposition percentages that are in the same range as those

obtained from household-level research. Second, it is meaningful to have different elasticities

for different support types, as indicated by pooling tests. The statistical significance of the

parameter estimates indicates that their reliability is very high while their face validity is

strong: almost all elasticities are significantly negative. Furthermore, we find that the results
are quite robust for different time window choices. Finally, the RESET test results indicate

that the assumption of constant elasticities is untenable.

To conclude, the primary contribution of this paper is a demonstration of the viability

of a store-level data-based decomposition of sales elasticities due to promotions into market

share, timing, and quantity elasticities. In addition, we show important extensions, and we

advocate the use of flexible decompositions for each of four support types.
 Table 1
Results from Household-Level Decomposition Research
1
Category Brand Timing Quantity
switching acceleration acceleration

Study
Gupta (1988) Coffee 84 14 2
Chiang (1991) Coffee (feature) 81 13 6
Coffee (display) 85 5 10
Chintagunta (1993) Yogurt 40 15 45
Bucklin, Gupta, and Siddarth (1998) Yogurt 58 19 22
Bell, Chiang, and Padmanabhan (1999) Margarine 94 6 0
Soft drinks 86 6 9
Sugar 84 13 3
Paper towels 83 6 11
Bathroom tissue 81 4 15
Dryer Softeners 79 1 20
Yogurt 78 12 9
Ice Cream 77 19 4
Potato Chips 72 5 24
Bacon 72 20 8
Liquid Detergents 70 1 30
Coffee 53 3 45
Butter 49 42 9

Average 74 11 15
1
Different studies may find different decomposition percentages for the same category due to
model differences, data differences, etcetera.

Table 2
Description of Product Categories
Category Tuna Tissue Shampoo Peanut butter
Country USA USA The The
Netherlands Netherlands
Data level Brand Brand Brand SKU
Number of stores 28 24 48 49
Number of weeks 104 52 109 144
Number of items with price promotions 4 6 5 5
Number of items without price promotions 1 0 6 7
Number of observations for estimation 10,304 5,760 23,095 30,895
# Price promotions w.o. support 1713 222 1103 643
# Price promotions with feature-only 435 113 268 329
# Price promotions with display-only 301 97 320 306
# Price promotions with feature and display 868 539 541 879

Table 3
Separate and Common Own-Brand Sales Elasticities and Pooling Test Results
Separate Common p-value
Without Feature-only Display-only Feature and
Category support display
Tuna 3.55 4.37 5.67 5.80 4.72 0.00
Tissue 2.02 5.01 5.36 5.97 5.44 0.00
Shampoo 1.87 2.61 3.81 4.37 2.90 0.00
Peanut butter 1.77 4.06 3.06 4.55 3.26 0.00
 Table 4
Decomposition of Constant Own-Brand Sales Elasticity: Parameter Estimates (Standard Errors)
Standard decomposition Extended decomposition

Own-brand Market Period Category Between- Total

sales share share sales store share market
elasticity elasticity elasticity elasticity elasticity elasticity
(1) (2) (3) (4) (5)
(6) Tuna
Without support 3.55 3.35 0.16 0.03 0.03 0.00
(0.06) (0.06) (0.02) (0.01) (0.01) (0.01)
Feature-only 4.37 3.85 0.43 0.09 0.02 0.11
(0.09) (0.09) (0.03) (0.02) (0.02) (0.01)
Display-only 5.67 5.13 0.48 0.06 0.06 0.00
(0.12) (0.12) (0.04) (0.02) (0.02) (0.01)
Feature and display 5.80 4.77 0.84 0.19 0.02 0.18
(0.06) (0.06) (0.02) (0.01) (0.01) (0.01)

Average 4.85 4.28 0.48 0.09 0.02 0.07

Tissue
Without support 2.02 1.86 0.23 0.07 - -
(0.25) (0.25) (0.09) (0.02) - -
Feature-only 5.01 4.00 0.97 0.04 - -
(0.23) (0.24) (0.08) (0.02) - -
Display-only 5.36 4.52 0.83 0.01 - -
(0.24) (0.25) (0.09) (0.02) - -
Feature and display 5.97 4.78 1.13 0.06 - -
(0.10) (0.10) (0.03) (0.01) - -

Average 4.59 3.79 0.79 0.01 - -

Shampoo
Without support 1.87 1.60 0.24 0.03 - -
(0.09) (0.09) (0.02) (0.01) - -
Feature-only 2.61 2.28 0.32 0.01 - -
(0.12) (0.12) (0.03) (0.02) - -
Display-only 3.81 3.32 0.45 0.04 - -
(0.15) (0.15) (0.04) (0.02) - -
Feature and display 4.37 3.60 0.69 0.08 - -
(0.11) (0.11) (0.03) (0.01) - -

Average 3.17 2.70 0.43 0.04 - -

Within-brand Between-brand
share share
elasticity (2a) elasticity (2b)
Peanut butter
Without support 1.77 1.68 0.06 0.02 1.50 0.19
(0.08) (0.07) (0.02) (0.01) (0.07) (0.03)
Feature-only 4.06 3.73 0.25 0.08 2.88 0.85
(0.10) (0.09) (0.03) (0.01) (0.09) (0.04)
Display-only 3.06 2.75 0.26 0.05 2.29 0.46
(0.08) (0.08) (0.02) (0.01) (0.08) (0.04)
Feature and display 4.55 4.12 0.34 0.09 3.27 0.85
(0.07) (0.07) (0.02) (0.01) (0.07) (0.03)

Average 3.36 3.07 0.23 0.06 2.49 0.59

Bold numbers indicate insignificant parameter estimates (two-sided, alpha = 0.05).
 Table 4
Continued
Averages across categories
Own-brand Market Period Category
sales share share sales
elasticity elasticity elasticity elasticity
(1) (2) (3) (4) - -
Without support 2.30 2.12 0.17 0.00 - -
Feature-only 4.01 3.47 0.49 0.06 - -
Display-only 4.48 3.93 0.51 0.04 - -
Feature and display 5.17 4.32 0.75 0.11 - -

Average 3.99 3.46 0.48 0.05 - -

 Table 5
Decomposition of Constant Price Elasticity: Percentages
Standard decomposition Extended decomposition

Own-brand Market Period Category Between- Total

sales share share sales store share market
elasticity elasticity elasticity elasticity elasticity elasticity
(1) (2) (3) (4) (5) (6)
Tuna
Without support 100% 94% 5% 1% 1% 0%
Feature-only 100% 88% 10% 2% 0% 3%
Display-only 100% 90% 8% 1% 1% 0%
Feature and display 100% 82% 14% 3% 0% 3%

Average 100% 88% 10% 2% 0.5% 1.5%

Tissue
Without support 100% 92% 11% 3% - -
Feature-only 100% 80% 19% 1% - -
Display-only 100% 84% 15% 0% - -
Feature and display 100% 80% 19% 1% - -

Average 100% 83% 17% 0% - -

Shampoo
Without support 100% 86% 13% 2% - -
Feature-only 100% 87% 12% 0% - -
Display-only 100% 87% 12% 1% - -
Feature and display 100% 82% 16% 2% - -

Average 100% 85% 13% 1% - -

Within-brand Between-
share brand share
elasticity elasticity
(2a) (2b)
Peanut butter
Without support 100% 95% 3% 1% 85% 11%
Feature-only 100% 92% 6% 2% 71% 21%
Display-only 100% 90% 8% 2% 75% 15%
Feature and display 100% 91% 7% 2% 72% 19%

Average 100% 91% 7% 2% 74% 17%

Averages across categories

Without support 100% 92% 8% 0% - -
Feature-only 100% 87% 12% 1% - -
Display-only 100% 88% 11% 1% - -
Feature and display 100% 84% 14% 2% - -

Average 100% 87% 12% 1% - -

 Table 6
Decomposition of Flexible Price Elasticity:
Averages across Categories
Standard decomposition
Percent Percent Percent
Own-brand market period category
sales share share sales
elasticity elasticity elasticity elasticity
price index (1) (2) (3) (4)
Without support
0.70 2.33 87% 11% 2%
0.75 2.32 89% 9% 1%
0.80 2.29 91% 9% 1%
0.85 2.28 92% 8% 0%
0.90 2.29 94% 7% 0%
0.95 2.34 95% 6% 1%
1.00 2.39 95% 5% 1%
Feature-only support
0.70 2.92 78% 20% 1%
0.75 3.35 82% 16% 1%
0.80 3.77 86% 13% 1%
0.85 4.31 88% 10% 2%
0.90 4.96 91% 8% 2%
0.95 5.57 92% 6% 2%
1.00 6.10 94% 5% 2%
Display-only support
0.70 2.45 71% 27% 3%
0.75 3.16 80% 18% 2%
0.80 3.92 86% 14% 1%
0.85 4.77 89% 11% 1%
0.90 5.77 91% 9% 0%
0.95 6.93 92% 8% 0%
1.00 8.18 92% 7% 0%
Feature and display support
0.70 1.92 66% 30% 5%
0.75 3.27 77% 20% 3%
0.80 4.64 82% 16% 2%
0.85 6.06 84% 14% 2%
0.90 7.56 86% 12% 2%
0.95 9.14 87% 12% 2%
1.00 10.80 87% 11% 1%
 Figure 1
Flexible Decomposition for Tuna Brands

Without support Fe ature -only support

1 1
0 0
-1 -1
-2 -2
-3 -3
-4 -4
elasticity

elasticity
-5 -5
-6 -6
-7 -7
-8 -8
-9 -9
-10 -10
-11 -11
-12 -12
-13 -13
-140.70 0.75 0.80 0.85 0.90 0.95 1.00 -14
0.70 0.75 0.80 0.85 0.90 0.95 1.00
price index price index

Display-only support Fe ature and display support

1 1
0 0
-1 -1
-2 -2
-3 -3
-4 -4
elasticity

elasticity

-5 -5
-6 -6
-7 -7
-8 -8
-9 -9
-10 -10
-11 -11
-12 -12
-13 -13
-14 -14
0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95 1.00
price index price index

Legend:
: category sales elasticity
: period share elasticity
: market share elasticity
: own-brand sales elasticity
 Figure 2
Flexible Decomposition for Tissue Brands

Without support Fe ature -only support

1 1
0 0
-1 -1
-2 -2
-3 -3
-4 -4
elasticity

elasticity
-5 -5
-6 -6
-7 -7
-8 -8
-9 -9
-10 -10
-11 -11
-12 -12
-13 -13
-14 -14
0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 1.00
price index 0.95 price index

Display-only support Fe ature and Display support

1 1
0 0
-1 -1
-2 -2
-3 -3
-4 -4
elasticity
elasticity

-5 -5
-6 -6
-7 -7
-8 -8
-9 -9
-10 -10
-11 -11
-12 -12
-13 -13
-14 -14
0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95 1.00
price index price index

Legend:
: category sales elasticity
: period share elasticity
: market share elasticity
: own-brand sales elasticity
 Figure 3
Flexible Decomposition for Shampoo Brands

Without support Fe ature -only

1 1 support
0 0
-1 -1
-2 -2
-3 -3
-4 -4
elasticity

elasticity
-5 -5
-6 -6
-7 -7
-8 -8
-9 -9
-10 -10
-11 -11
-12 -12
-13 -13
-14 -14
0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95 1.00
price index price index

Display-only support Fe ature and Display support

1
1 0
0 -1
-1 -2
-2 -3
-3 -4
elasticity

-4
elasticity

-5
-5 -6
-6 -7
-7
-8
-8
-9
-9
-10
-10
-11
-11
-12
-12
-13
-13
-14
-14
0.70 0.75 0.80 0.85 0.90 0.95 0.70 0.75 0.80 0.85 0.90 0.95 1.00
1.00 price index price index

Legend:
: category sales elasticity
: period share elasticity
: market share elasticity
: own-brand sales elasticity
 Figure 4
Flexible Decomposition for Peanut Butter SKUs
Without support Fe ature -only support
1 1
0 0
-1 -1
-2 -2
-3 -3
-4 -4
elasticity

elasticity
-5 -5
-6 -6
-7 -7
-8 -8
-9 -9
-10 -10
-11 -11
-12 -12
-13 -13
-14 -14
0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95
price index 1.00 price index

Display-only support Fe ature and display support

1
1 0
0
-1
-1
-2
-2
-3
-3
-4
elasticity

-4
elasticity

-5
-5
-6
-6
-7
-7
-8
-8
-9
-9
-10 -10
-11 -11
-12 -12
-13 -13
-14 -14
0.70 0.75 0.80 0.85 0.90 0.95 0.70 0.75 0.80 0.85 0.90 0.95 1.00
1.00 price index price index

Legend:
: category sales elasticity
: period share elasticity
: market share elasticity
: own-SKU sales elasticity
 APPENDIX
Flexible Estimation of Elasticities

In section 3.5 we use the fact that an elasticity is the derivative of one log variable with
respect to another log variable:
y p ln( y )
.
p y ln( p)

To allow the elasticity to depend on the level of predictor variable p = p0, we use local

polynomial regression. Specifically, to estimate the derivative at ln(p) = ln(p0), while

controlling for constant effects of other covariates (in xi ), we postulate a locally weighted

polynomial regression:
2
K h (ln( pi ) ln( )),

n d
ln y i j (ln( p i ) ln( p 0
)) ix
j
p0

i 1 j 0

where Kh(.) denotes a Kernel function and h is a bandwidth. We minimize this equation by

using Weighted Least Squares, and thus obtain the set { j (j=0,...,d), }. The derivative

of ln(y) with respect to ln(p) at ln(p) =ln( p0) is then obtained as 1 .

Kernel K(.) determines the weight of neighboring observations. We use the default

option for the function locpoldis in the software package XploRe (www.XploRe-stat.de),
15
i.e., the quartic kernel: K (u) (1 (u / h) 2 ) 2 {| u / h | 1} . The bandwidth parameter is
0.6h
16

for all data sets (see main text for rationale). We take a second-order polynomial (d = 2),

hence the method we use is local quadratic. This choice is based on Fan and Gijbels (1996,

section 3.3) who argue that for the estimation of derivatives the polynomial degree should be

two.
 8. REFERENCES
Bell, David R., Chiang, Jeongweng, Padmanabhan, V. 1999. The Decomposition of Promotional
Response: An Empirical Generalization. Marketing Science 18(4) 504-526.

Bucklin, Randolph E., Gupta, Sunil. 1999. Commercial Use of UPC Scanner Data: Industry and
Academic Perspectives Marketing Science 18(3) 247-273.

Bucklin, Randolph E., Gupta, Sunil, Siddarth, S. 1998. Determining Segmentation in Sales Response
Across Consumer Purchase Behaviors. Journal of Marketing Research 35 (May) 189-197.

Bucklin, Randolph E., Lattin, James M. 1992. A Model of Product Category Competition Among
Grocery Retailers. Journal of Retailing 68(3) 271-293.

Chiang, Jeongwen. 1991. A Simultaneous Approach to the Whether, What and How Much to Buy
Questions. Marketing Science 10(4) 297-315.

Chintagunta, Pradeep K. 1993. Investigating Purchase Incidence, Brand Choice, and Purchase
Quantity Decisions of Households. Marketing Science, 12(2) 184-208.

Christen, Markus, Gupta, Sachin, Porter, John C., Staelin, Richard, Wittink, Dick R. 1997. Using
Market-Level Data to Understand the Promotion Effects in a Nonlinear Model. Journal of Marketing
Research 36 (August) 322-334.

Fan, Jianqing. 1992. Design-adaptive nonparametric regression. Journal of the American Statistical
Association 87(420) 998-1004.

Fan, Jianqing, Gijbels, Irne. 1996. Local Polynomial Modeling and Its Applications. Chapman &
Hall, Suffolk.

Gupta, Sunil. 1988. Impact of Sales Promotion on When, What and How Much to Buy. Journal of
Marketing Research 25 (November) 342-355.

Inman, Jeffrey, McAlister, Leigh, Hoyer, Wayne D. 1990. Promotion Signal: Proxy for Price Cut?.
Journal of Consumer Research 17 74-81.

Judge, George G., Griffiths, W. E., Carter Hill, R., Ltkepohl, Helmut, Lee, Tsoung Chao. 1985. The
Theory and Practice of Econometrics. John Wiley and Sons, Singapore.

Kumar, V., Leone, Robert P. 1988. Measuring the Effect of Retail Store Promotion on Brand and
Store Substitution. Journal of Marketing Research 25 (May) 178-185.

Stewart, Jon. 1991. Econometrics. Philip Allan, Hemel Hemstead.

Van Heerde, Harald J., Leeflang, Peter S. H., Wittink, Dick R. 2000. The Estimation of Pre- and
Postpromotion Dips with Store-Level Scanner Data. Journal of Marketing Research 37 (August) 383-
395.

Van Heerde, Harald J., Leeflang, Peter S. H., Wittink, Dick R. 2001. Semiparametric Analysis to
Estimate the Deal Effect Curve. Journal of Marketing Research 38 forthcoming.

Wheat, Rita D. Morrison, Donald G. 1990. Assessing Purchase Timing Models: Whether Or Not is
Preferable to When. Marketing Science 9(2) 162-170.
END NOTES
1
Studies conducted in the 1990's appear to prefer to model the whether over the when
question. This change may have been inspired by Wheat and Morrison (1990) who show that
the modeling of purchase incidence is almost always preferable to the modeling of
interpurchase time.
2
We take the sum across all brands in the category including the brands that do not use price
promotion instruments (the inactive brands). The estimation of the models is based on the
active brands only.
3
Assuming no difference in the absence or presence of other promotions between the two
windows.
4
We do not use an automated bandwidth selection technique, such as least squares cross
validation, since the required computer time would be excessive (several months).
5
With one exception: feature-only supported price discounts in the shampoo category.
However, the graph shows generally a less negative elasticity for higher discounts.