Unintended Consequences of Promotions: Should Managers Worry About Consumer Stockpiling?

Increase in sales due to promotions could come at the expense of competitors; such sales come from consumers who have relatively weak brand preferences. Increased sales from consumers with strong brand preferences are likely to be at the expense of the promoted brand. In other words, brand loyal consumers can take advantage of promotions to stockpile for future consumption. Thus, loyal consumers who would be otherwise willing to buy at high prices can strategically stockpile at low prices. What is its impact on firms’ profits? How should firms adapt to consumer stockpiling? To answer these questions we model a duopoly competing for loyal and switching consumers. In contrast to extant finding that stockpiling by switching consumers does not affect firms’ profitability, we find that stockpiling by loyal consumers (empirically who are found more likely to stockpile) indeed reduces firms’ long-run profits. We also find that even when stockpiling may induce higher consumption, it reduces but does not eliminate losses. Furthermore, we establish an upper bound on the loss due to loyal consumers’ stockpiling. Surprisingly, we find that it amounts to a relatively small percentage of profits. We also obtain a novel finding on mixed strategies that firms’ equilibrium pricing distributions can have mass points in the interior of the support. Our results also offer several counter-intuitive insights of relevance to managers.