Join us for an ERIM research seminar in Marketing.
Abstract
This paper develops a continuous-time model in which cyclic price promotions endogenously generate time-varying demand elasticities, even when consumer preferences are static. In the model, price promotions sort consumers with heterogeneous valuations into waiting or purchasing states, leading price sensitivity to evolve over time as promotions unfold. We characterize two empirical challenges that arise in such settings. First, we show that experiments introducing promotions out of sync with the market’s natural promotion cycles can produce biased elasticity estimates, with the bias depending on both the timing and duration of the intervention. Second, we demonstrate that even when prices are exogenous, correcting for potential endogeneity via lagged-price instruments can introduce finite-sample biases due to the discrete nature of price changes during promotions. Using experimental data from Elberg, Gardete, Macera, and Noton (2019), we assess the magnitude of these effects and show they can be economically meaningful. The results provide practical guidance for researchers designing price experiments or analyzing promotional data with endogeneity corrections.
