Trade promotions and consumer search in supermarket retailing

The influence of consumer search costs on trade promotions (TP) pass-through rates was studied. A test for the 'consumer search' was devised and was applied to retail and wholesale breakfast cereal price data for five supermarkets in the Los Angeles market over a 156-week period. The results show that consumer search costs cause retail prices to rise quickly and fall slowly. Promotion pass-through, or deal pass-through, can therefore be expected to be higher among retailers offering a low search-cost environment. Limited selection, low price dispersion, heavy price advertisement, or frequent emails, facebook updates, or Twitter feeds are all means of minimizing consumer search costs. The implications of the research are potentially important for both retailers and manufacturers in a number of ways. Manufacturers and wholesalers interested in improving pass-through performance would be well-served to consider ways in which they could reduce consumer search costs, perhaps by directly communicating trade promotions to consumers.