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Trade spends and profitability of promotions

Trade spends and profitability of promotions This paper examines the prevalent mechanism of financing advertising and temporary price reductions through trade spend budgets. A manufacturer and a retailer interact for a number of periods with a plan to hold a sale in the last period. During the nonpromotional periods, the retailer accumulates the funds in this budget in proportion to the size of its order from the manufacturer. In the sale period, the budget is used to finance the discount offered by the manufacturer and advertising. I find that the manufacturer drops its price in the sale period to increase the profitability of promotions for the retailer. To be able to sell more units during the sale period, the retailer needs to accumulate a larger trade spend. This is accomplished by setting a smaller mark‐up over the manufacturer's price in the regular periods. The manufacturer takes advantage of the retailer's softer pricing by increasing its regular wholesale price. As long as such trade spends are used to finance advertising, the total profits of each firm increase. Using fixed trade spends, where the manufacturer allocates a fixed amount for the retailer, does not lead to an increase in profits. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Trade spends and profitability of promotions

Sinitsyn, Maxim
Journal of Economics & Management Strategy , Volume Early View – May 16, 2023
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16 pages

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Publisher
Wiley
Copyright
© 2023 Wiley Periodicals LLC.
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/jems.12525
Publisher site
See Article on Publisher Site

Abstract

This paper examines the prevalent mechanism of financing advertising and temporary price reductions through trade spend budgets. A manufacturer and a retailer interact for a number of periods with a plan to hold a sale in the last period. During the nonpromotional periods, the retailer accumulates the funds in this budget in proportion to the size of its order from the manufacturer. In the sale period, the budget is used to finance the discount offered by the manufacturer and advertising. I find that the manufacturer drops its price in the sale period to increase the profitability of promotions for the retailer. To be able to sell more units during the sale period, the retailer needs to accumulate a larger trade spend. This is accomplished by setting a smaller mark‐up over the manufacturer's price in the regular periods. The manufacturer takes advantage of the retailer's softer pricing by increasing its regular wholesale price. As long as such trade spends are used to finance advertising, the total profits of each firm increase. Using fixed trade spends, where the manufacturer allocates a fixed amount for the retailer, does not lead to an increase in profits.

Journal

Journal of Economics & Management Strategy – Wiley

Published: May 16, 2023

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