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A Model of how Discounting High-Priced Brands Affects the Sales of Low-Priced Brands

Drawing on a consumer preference distribution structure postulated in analytical modeling research, the author develops a Separate Effects Model that separates the total discount effect of a competing high-priced brand on the sales of the focal low-priced brand into discount effect in the region where price of the competing brand is (1) above the price of the focal brand, (2) equal to the price of the focal brand, and (3) below the price of the focal brand. The author applies the model to store-level data on fabric softener and illustrates the steps involved in the estimation and usefulness of model results. In particular, he shows that the Separate Effects Model can (1) identify the source of the discount effect observed in the conventional model, (2) uncover discount effects not detected in the conventional model, and (3) guide managers’ decisions related to discount sizes and provide some insights about brand strength. An interesting substantive finding from the empirical analysis is that the leading national brand can draw sales from competing brands without reducing its price below the price of the other brands.