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Measuring Price Promotion Effects

An Econometric Exercise in Measuring the

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Impact of Marketing Decision Making
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04/2014-5090
This technical exercise was prepared by Klaus Wertenbroch, Associate Professor of Marketing at INSEAD
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(klaus.wertenbroch@insead.edu), to illustrate and practice how to measure the impact of price promotions in
packaged goods industries. It is intended for teaching purposes only. The exercise requires the use of an
accompanying data file.
Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at
cases.insead.edu.
Copyright © 2006 INSEAD/Klaus Wertenbroch
COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED
IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.

This document is authorized for educator review use only by ANDRES LUENGO, Pontificia Universidad Javeriana until May 2021. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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This exercise provides you with an illustrative excerpt from a very large scanner data file with

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hundreds of thousands of observations, in which a large supermarket chain in a metropolitan
area records its weekly soft drink sales. The data are aggregated at the store level, that is,
each observation denotes sales of one UPC (universal product code) per week and store. The
data cover sales in seven stores and 52 weeks. One could aggregate the data even more by
adding sales across all stores to determine chain-wide sales per week, etc. This is very

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different from individual customer panel data, which you can collect for an individual
transaction by using the “most valued customer” cards that grocery stores distribute.
The data are somewhat pruned and simplified by including sales of only two brands, X and Y,
by translating UPC codes into brand names (UPC_X and UPC_Y), and by adding regular
versus diet soft drink classifications (CLASS). The organization of the data has also been
simplified. For each week and store, the data have been matched such that for each format
(size, flavor, and class) there are two UPCs that are listed in each data row, one for brand X

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and one for brand Y, complete with their unit prices and unit costs. This data structure
facilitates the analysis of cross-price elasticities of demand.
STORE: identification of individual stores in which an observation was recorded
Hval_150: the percentage of real estate property in the so-called store trading area (i.e., the
store neighborhood) whose value exceeds $150,000
WEEK: the week in which an observation was recorded
OUNCES: package weight (number of liquid ounces per package)
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UPC_X: universal product code for brand X item
deal_X: ndicator/dummy of whether a UPC was price-promoted by brand X that week
(takes on 0 or 1)
feat_X: ndicator of whether UPC was advertised or put on in-store display by brand X
that week (takes on 0 or 1)
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oz_X: the number of liquid ounces sold for a UPC by brand X (per week and store)
pack_X: he number of packs sold for a UPC by brand X (per week and store)
UPC_Y: universal product code for brand Y item
deal_Y: indicator/dummy of whether a UPC was price-promoted by brand Y that week
(takes on 0 or 1)
feat_Y: indicator of whether UPC was advertised or put on in-store display by brand Y
that week (takes on 0 or 1)
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oz_Y: the number of liquid ounces sold for a UPC by brand Y (per week and store)
pack_Y: the number of packs sold for a UPC by brand Y (per week and store)
pX: the retail price per liquid ounce for a UPC by brand X (per week and store) in
dollars
pY: the retail price per liquid ounce for a UPC by brand Y (per week and store) in
dollars
cX: the retailer’s cost (i.e., the manufacturer price) per liquid ounce for a UPC by
brand X (per week and store) in dollars
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cY: the retailer’s cost (i.e., the manufacturer price) per liquid ounce for a UPC by
brand Y (per week and store) in dollars
class: classification as regular versus diet soft drink

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This document is authorized for educator review use only by ANDRES LUENGO, Pontificia Universidad Javeriana until May 2021. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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As a market researcher, your job is to determine the aggregate store-level constant price

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elasticity of demand for regular and promotional prices (note that a promotional price is
indicated by deal_X or deal_Y=1 and a regular price by deal_X or deal_Y=0) for each of the
two brands. “Constant” means that you estimate a non-linear demand curve such that at each
point of the curve, the elasticity is the same. [Note that for linear demand curves, the price
elasticity of demand changes as you move along the curve; think back to microeconomics.]

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Beyond these fancy terms, this is actually quite simple ⎯ it’s just another regression analysis
of the sort you have done in statistics.1
You will use a so-called log-log regression model, regressing the natural log (to the basis e,
Euler’s number) of sales on the natural log of price. This will “linearize” a non-linear demand
function. So you first take the natural log of oz_X or oz_Y and the natural log of pX or pY,
that is, you first transform the variables in the data file, using the natural log, which is called
“ln”.

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The substantive reason for using this log-log model is that it takes what in reality is a curved
(due to diminishing marginal utility) demand function and makes it linear for the purpose of
analysis. This is statistically convenient, because it can be shown that the regression
parameter for the independent variable ln(pX) or ln(pY) is a constant elasticity, indicating by
what percentage the dependent variable “sales” (i.e., demand, or oz_X or oz_Y) changes in
response to a one-percent change in price (let’s not worry about the mathematical derivation
of this here). 2 Remember, the price elasticity of demand is defined as the percent change in
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demand divided by the percent change in price. [Note that your elasticity estimates depend on
the prices charged by competing brands and would change when these prices change.]
Here is what you have to do:
1. The simplest model you can run is ln(oz_X)=α+β· ln(pX)+ ε and ln(oz_Y)=α+β· ln(pY)+
ε. Run it. What are the constant price elasticities of demand (for all prices) of each of the
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two brands?
2. How can you determine if regular and promotional prices have different elasticities? To
do that, how would you alter the above regression model? Specify your own model, run
it, and determine if the elasticities are statistically different for each of the two brands.
[HINT: To do that, think about how to include the variable deal_X or deal_Y in your
model.]
The exercise may look a little difficult, because it requires some statistics; but it’s really more
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about your economic intuition. Keep in mind that it is an example of what you would have to
do, or at least be at ease with, as a market researcher who measures demand or as a Fast
Moving Consumer Goods (FMCG) category manager or consultant who relies on market
research. So get your hands dirty with some real world data!
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1 The simplest way to do this is with the Regression function in Excel’s Data Analysis tool pack (under
Tools, click on Data Analysis, and then on Regression; for details on how to install this, search for the key
word “regression” in Excel’s help function).
2 For details, see, for example, Pindyck, Robert S., and Daniel L. Rubinfeld (2000), Microeconomics,
Englewood Cliffs, NJ: Prentice Hall.

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This document is authorized for educator review use only by ANDRES LUENGO, Pontificia Universidad Javeriana until May 2021. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860