Managing Price Promotions Within a Product Line

In this paper, I investigate the question of how a …rm producing substitutes should coordinate price promotions of these products. I model price competition between two …rms, each producing two products that are horizontally di¤erentiated with respect to some characteristic. Consumers are divided into loyals, who always purchase their preferred product, and switchers who have heterogeneous preferences for the four products. If consumers substitute easily between the products produced by one …rm, the …rms promote one product at a time to avoid cannibalization. If consumers mainly substitute between the products with the same characteristic, the …rms often employ joint promotions with at least one product at a deep discount. If, at the same time, consumers easily substitute to the products in other categories, the …rms use joint promotions less often and avoid simultaneous deep discounts. Department of Economics, University of California, San Diego, La Jolla, California, 92093, [email protected]