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Optimal Price and Advertising Policy for a Convenience Goods Retailer

Author

Listed:
  • Gustav Feichtinger

    (University of Technology, Vienna)

  • Alfred Luhmer

    (University of Bielefeld)

  • Gerhard Sorger

    (University of Technology, Vienna)

Abstract
Convenience goods are bought without much consideration or effort on the part of the consumer. Buyers don't try to get the best bargain when purchasing individual convenience items. Instead, they adapt their store choice habits so that they can expect, on average, good value for money in the long run. Store choice is governed by aggregate information which is received on the price levels of stores. This is embodied in store price images. A store price image is defined in the subsequent paper as a perceived difference between the store's price level and a reference level that consumers expect of stores about which they have no particular information. Store price images are learnt adaptively over time. We propose a theoretical model of store price image adaptation and a two-stage sales response model. According to the latter, a store's price image and advertising determine the number of customers attracted per period. Sales per visit, however, depend only on the prices actually observed in the store. For this sales model, we have studied the optimal price and advertising policy making simple assumptions of cost. Our main interest is the interaction between optimal advertising and price image. It turns out that image improvement is achieved mainly through pricing; increased advertising follows only after the price image has been improved. Therefore, as long as the price image is poor relative to some optimal equilibrium level, a larger portion of the marketing budget should be allocated to lower prices rather than to advertising. In phases where the price image declines towards the equilibrium, however, heavier advertising is profitable.

Suggested Citation

  • Gustav Feichtinger & Alfred Luhmer & Gerhard Sorger, 1988. "Optimal Price and Advertising Policy for a Convenience Goods Retailer," Marketing Science, INFORMS, vol. 7(2), pages 187-201.
    • Handle: RePEc:inm:ormksc:v:7:y:1988:i:2:p:187-201
    DOI: 10.1287/mksc.7.2.187
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    Citations

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    Cited by:

    1. Alfred Taudes & Christian Rudloff, 2012. "Integrating inventory control and a price change in the presence of reference price effects: a two-period model," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 75(1), pages 29-65, February.
    2. Carlos Lourenco & Els Gijsbrechts, 2022. "Details and Big Pictures: Consumer Use of Actual Prices and Price Images When Choosing a Store," Working Papers Department of Economics 2022/02, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    3. Sarkar, Dev Narayan & Kundu, Kaushik & Roy Chaudhuri, Himadri, 2016. "Constructing a conceptual model of purchase behaviour of village shopkeepers – a study of small rural retailers in Eastern India," Journal of Retailing and Consumer Services, Elsevier, vol. 28(C), pages 1-16.
    4. G. E. Fruchter, 2008. "Dual-Role Based Pricing in a Dynamic and Competitive Environment," Journal of Optimization Theory and Applications, Springer, vol. 138(1), pages 27-44, July.
    5. Elshiewy, Ossama & Peschel, Anne O., 2022. "Internal reference price response across store formats," Journal of Retailing, Elsevier, vol. 98(3), pages 496-509.
    6. Caulkins, Jonathan P. & Feichtinger, Gustav & Grass, Dieter & Hartl, Richard F. & Kort, Peter M. & Seidl, Andrea, 2017. "Interaction of pricing, advertising and experience quality: A dynamic analysis," European Journal of Operational Research, Elsevier, vol. 256(3), pages 877-885.
    7. Desmet, Pierre & Le Nagard, Emmanuelle & Vinzi, Vincenzo Esposito, 2012. "Refund depth effects on the impact of price-beating guarantees," Journal of Business Research, Elsevier, vol. 65(5), pages 603-608.
    8. Michał Kot, 2022. "An agent-based model of consumer choice. An evaluation of the strategy of pricing and advertising," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 32(1), pages 73-95.
    9. Lourenço, Carlos J.S. & Gijsbrechts, Els, 2013. "The impact of national brand introductions on hard-discounter image and share-of-wallet," International Journal of Research in Marketing, Elsevier, vol. 30(4), pages 368-382.
    10. Schlosser, Rainer, 2016. "Joint stochastic dynamic pricing and advertising with time-dependent demand," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 439-452.
    11. Teng, Jinn-Tsair & Thompson, Gerald L., 1996. "Optimal strategies for general price-quality decision models of new products with learning production costs," European Journal of Operational Research, Elsevier, vol. 93(3), pages 476-489, September.
    12. Herbert Dawid & Engelbert Dockner & Richard Hartl & Josef Haunschmied & Ulrike Leopold-Wildburger & Mikulas Luptacik & Alexander Mehlmann & Alexia Prskawetz & Marion Rauner & Gerhard Sorger & Gernot T, 2010. "Gustav Feichtinger celebrates his 70th birthday," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 18(4), pages 437-451, December.
    13. Huang, Jian & Leng, Mingming & Liang, Liping, 2012. "Recent developments in dynamic advertising research," European Journal of Operational Research, Elsevier, vol. 220(3), pages 591-609.
    14. Graciola, Ana Paula & De Toni, Deonir & de Lima, Vinicius Zanchet & Milan, Gabriel Sperandio, 2018. "Does price sensitivity and price level influence store price image and repurchase intention in retail markets?," Journal of Retailing and Consumer Services, Elsevier, vol. 44(C), pages 201-213.

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