Do Promotions Increase Store Expenditures?
A Descriptive Study of Household Shopping Behavior
Download a pdf version of this paper.
- Xavier Drèze
Naufel J. Vilcassim
- Quantitative Marketing and Economics
2004, 2 (1), 59-92
- This paper investigates whether households' grocery shopping expenditures are
preset before entering the store or are flexible and determined while in the store as a
function of the specific store offerings encountered during the store visit. This is an
important question for the retailer in light of the vast array of temporary promotions
offered to consumers. Indeed, should expenditures be fixed before entering the store (for
instance, as a function of the household’s inventory and/or socio-demographic
characteristics), it is possible that retailers might actually decrease their profitability when
running promotions by displacing expenditure from high margin items to lower margin
We claim that to answer this question meaningfully one must consider the totality
of the household’s within-store purchases (i.e., the market basket) and not just purchases
of the promoted products. Accordingly, we propose an expenditure allocation framework
derived from the economics literature on the neo-classical theory of household choice
behavior. Using an extended version of the Almost Ideal Demand System (AIDS), we
study not only the household’s expenditure decision, but also how that expenditure is
allocated across product categories. We show how this framework can be applied at all
stages of decision making, from broad product expenditures to specific item selections.
We apply our methodology to analyze household purchases of an entire basket of goods
at a leading European supermarket chain and show how retail store managers can gain
meaningful insights from this analysis regarding their pricing and promotion decisions.