A Characterization of Retailer Response to Manufacturer Trade Deals

Journal of Marketing Research, November 1999

Rajeev K. Tyagi

Abstract

This paper provides a simple characterization of retailer response to manufacturer trade deals in terms of the consumer demand conditions that the retailer faces. Specifically, we show conditions on the curvature of consumer demand functions that make it optimal for a profit-maximizing retailer to pass-through equal-to/less-than/greater-than hundred percent of the trade deal amount it gets from a manufacturer. Using these conditions, the paper demonstrates that whereas the linear and all concave consumer demand functions lead to less than hundred percent optimal retail pass-through, there exists a subset of convex consumer demand functions for which a retailer rationally engages in greater than hundred percent pass-through. Interestingly, this subset contains many commonly used demand functions such as the constant elasticity demand function, the negative exponential demand function, and many other varying elasticity demand functions.

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