Modeling coupon values for ready -to -eat breakfast cereals
While researchers in marketing have analyzed the functions of coupons in depth, they have largely ignored the determinants of their face values. This gap in the literature may be traced to data constraints.
The objective of this study is to develop and test a model that explains the determinants of coupon values at the brand level. The factors that affect brand prices and discount levels are identified using price discrimination theory and the principles of demand. The framework is applied to the ready-to-eat (RTE) breakfast cereal industry and operationalized with a simultaneous, two-equation, linear-additive, fixed-effects, panel-data model estimated with two-stage least squares.
This research finds that when cereal makers raise brand prices, they increase the discounts for their products to price discriminate between consumer groups. The face values of coupons are inversely related to the level of consumer brand loyalty. In addition, discount levels are associated with brand shares, thus implying that couponing is a share-maintenance tool. When manufacturers issue coupons to encourage switching among similar brands, their rivals offer greater concessions on their own cereals to protect sales. The brand-specific effects suggest that in the early 1990s, the manufacturers engaged in an excessive level of couponing.
This research also reveals that the causal relationship between cereal prices and discount levels is bi-directional. Cereal prices are influenced by materials costs and inventory levels, but mass-media advertising expenditures and employee compensation are insignificant factors in the empirical model. Furthermore, brand prices are strongly tied to the prices of rival cereals in the same demand segment. Coupled with information from confidential company documents, this finding verifies the contention that RTE cereal manufacturers generally avoid price competition. The empirical model accounts for the industry-wide discounting behavior which occurred in mid-1996. Post's prices and discounts fell dramatically that year, and General Mills reduced its prices slightly. Contrary to expectations, Kellogg's brand prices and discounts were not significantly different from those in other years. Transient brands of cereal appear to be relatively insulated from this direct competition.