Optimal pricing strategies under consumer stockpiling and store loyalty

Empirical examination of the pricing policies of brands in several categories reveals that the pricing distribution is multi-modal with firms offering shallow and deep discounts with varying frequencies. Another interesting feature of these pricing distributions is that the modes are in the interior of the support. However, extant theory on price promotions predicts that the equilibrium pricing density will be bi-modal and the modes will be at the ends of the support of the distribution. In the first chapter, we develop a dynamic game-theoretic model which allows for some price sensitive consumers to stockpile at promotional prices. We examine how such behavior affects firms' pricing strategy in a setting where firms and consumers interact repeatedly over an infinite horizon. In the second paper, we develop a model to analyze firm's optimal promotional strategies in a setting where consumers with strong brand preferences stockpile. In this model some consumers are loyal to each one of the firms and only buy their favorite brand and other consumers switch brands to buy from the lowest priced firm in each period. Recent empirical studies document that while loyal consumers are not price sensitive in brand choice decision they are more price sensitive in quantity decisions. To accommodate this fact, we allow some loyals to stockpile in this model. Surprisingly, we find that consumer stockpiling behavior does not affect firms' profit margins much, when firms use the optimal promotional strategies. In the third chapter, we looked at consumer's store loyalty trait. The literature on store loyalty views a consumer as possessing store loyalty towards a particular store for their overall grocery shopping needs. In this study, we show that store loyalty is a category-specific trait of a consumer. In other words, while a given customer may be loyal to Store A in category 1, the same customer may be loyal to Store B in category 2; we call this 'store-category loyalty'. We estimate household-, category-, and store-specific drivers of 'store-category loyalty' using scanner panel data of 1321 households in 284 grocery categories across 16 stores over a 53-week period.