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The strategy Philip Morris adopted in 1993 featured a one-time, permanent, publicly announced price cut, an event referred to as Marlboro Friday. Little is known about the impact of permanent and publicly announced price cuts on consumer brand switching behaviors for an addictive product. In the context of Marlboro Friday, we investigate (1) how consumers' brand choices are affected by a permanent price cut, (2) whether differential and dynamic effects of permanent price cuts occur for different types of consumers, and (3) the implications of publicly announced permanent price cuts on consumer brand switching behavior in the long run. We develop a dynamic structural brand choice model that allows for consumer forward-looking behavior, learning, and addiction, and investigate how consumers adjusted their brand choice behaviors before and after this permanent price cut. Using unique consumer panel data pertaining to cigarette purchases before and after the event, we provide behavioral explanations of whether and how the drastic and permanent price cut represented an effective step to encourage brand switching for an addictive product and a necessary step for Philip Morris to combat the growing market share of generic brands.
Key words: Marlboro Friday; permanent price cut; brand switching; choice model; uncertainty; learning; price expectation; risk aversion; addiction; dynamic structural model
History: Received: August 1, 2006; accepted: March 19, 2008; processed by Tülin Erdem. Published online in Articles in Advance November 21, 2008.
(ProQuest: ... denotes formulae omitted.)
1. Introduction
In the past two decades, discount brands, such as private labels and generics, have experienced tremendous growth. Consumers traditionally viewed these products as poor substitutes for branded goods and were willing to pay a premium price to avoid an unknown brand. As the quality of discount brands improved and they started to gain market share, many national brand manufacturers raised their prices to recoup their losses. The increasing price gap reinforced opportunities for generic brands to exploit price-sensitive consumer segments, and by the early 1990s, generic brands had risen from a marginal force to leading the dynamics of the marketplace in many industries. National brand manufacturers tried to counter the growth of discount brands through traditional marketing approaches, such as promotion and advertising increases, new product introductions, product-line management, and aggressive temporary price promotions (see Hoch...