Spillover Effects of Temporary Price Cuts

Temporary price cut is one of the most popular marketing tactics in the supermarket industry. We examine the effects of price promotions on storewide profitability. Using a treatment effect setting we estimate the shortterm and long-term promotional effects that spill over into other product categories using supermarket scanner data. In an effort to remove the selection bias due to differences in the subpopulations of the treatment and the control groups, we use several nonparametric imputation methods. The detailed information on household level purchases and store visits allows us to improve matching quality in the estimation. We find that the effects of price promotion on storewide sales deteriorate over time and that the spillover effects are substantial. This suggests that pricing strategies of multi-product retailers maximizing storewide profits should take into account the spillover effects of short-term pricing.