“Angels and Devils, Do We Want Both? Price Promotion in Markets with Heterogeneous Consumers” by Wen CAO
Author:
Wen CAO
Indiana University
Some consumers have a lower willingness to pay than others. This raises the question of when it is profitable for manufacturers and retailers to offer sales to attract demand from the low segment. In this paper, we endogenize both wholesale and retail pricing decisions and quantify the conditions under which sales promotion is a subgame perfect Nash equilibrium. We show that when the difference in reservation prices is small relative to the proportion of high valuation consumers, price promotion is not only optimal but creates a win-win-win situation for all the players in the game. The model is calibrated using the data collected from fatwallet.com to provide numerical examples that illustrate our theoretical results.
