Promotion Effect on Endogenous Consumption

Abstract

Over the years, researchers have found that promotion makes consumers switch brands and purchase earlier or more. However, it is unclear how promotion affects consumption, especially for product categories that are perceived to be versatile and substitutable. In this paper, we propose a dynamic structural model with endogenous consumption under promotion uncertainty to analyze the promotion effect on consumption. This model recognizes consumers as rational decision makers who form promotion expectations and plan their purchase and consumption decisions in light of promotion schedule. Applying the proposed model to packaged tuna and yogurt, we find that endogenous consumption responds to promotion as a result of forward-looking and stockpiling behavior. This is the first empirical paper that recognizes consumption as an endogenous decision variable and proposes a structural model to offer behavioral explanations on whether, how, and why promotion encourages consumption for product categories with flexible consumption.

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