The Better They are, the more They Give: Trade Promotions of Consumer Durables

Abstract

The authors study trade promotions for durable goods, such as automobiles, for which manufacturers provide special incentives to dealers for exceeding specific sales targets. They develop a theoretical model of consumer, retailer, and manufacturer behavior based on observations about key aspects of the automobile market. The analysis provides important insights about the intertemporal effects of trade promotions and the effect of product durability on the promotion strategies of manufacturers. For example, manufacturers of more durable products benefit more from running trade promotions and give deeper discounts. The authors find empirical support when they test the theoretical results.