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1. Introduction
Promotional sales, i.e. significant temporary price reductions, are an important tool in the marketing mix of food retailers worldwide. For many consumer packaged goods, most of the marketing budget is directed to promotional sales (Srinivasan et al., 2004). The role of promotional sales is to attract customers to the store and to advertise certain products. Breakfast cereals in Germany are on promotional sale every 10 to 20 weeks. Average price reductions range from 7 to 15 per cent. According to Hosken and Reiffen (2004) and Berck et al. (2008), promotional sales make up to 50 per cent of annual product price variations[1].
The massive use of promotional sales has led researchers in business and economics to develop theories explaining this feature. Seminal contributions by Varian (1980) and Narasimhan (1988) show that sales may be used to discriminate between different types of consumers, e.g. between informed and uninformed consumers or between shoppers and store loyal consumers. Based on these theories, various model extensions have been produced to investigate the role of brand loyalty for price promotions (see Raju et al., 1990; Rao, 1991; Agrawal, 1996; Anderson and Kumar, 2007; Jing and Wen, 2008; Koçaş and Bohlmann, 2008). Brand loyalty describes the lack of consumer switching to alternative brands over certain price ranges. The level or the degree of brand loyalty “is defined as the minimum difference between the prices of two competing brands necessary to induce the loyal consumer of one brand to switch to the competing brand” (strength of brand loyalty) (Raju et al., 1990, p. 279). The size of the brand loyal segment describes the number of loyal consumers (size of brand loyalty). Price promotions are generally characterized by the frequency and the depth of price discounts.
The basic mechanism of most models of promotional sales and brand loyalty is driven by the profit trade-off between charging high prices to exploit loyal consumers and offering frequent and/or deep price discounts to attract new customers. The optimal promotional strategy depends on the consumers’ brand loyalty, namely, the size and the strength of brand loyalty, further attributes of consumer behavior and the competition between manufacturers and/or retailers. Koçaş and Bohlmann (2008) are the first to model competition between retailers. Their main...