Channel pass-through of trade promotions

Packaged goods manufacturers spend in excess of $75 billion annually on trade promotions, even though their effectiveness has been hotly debated by academics and practitioners for decades. One reason for this ongoing debate is that empirical research has been limited mostly to case studies, managerial surveys, and data from one or two supermarket chains in a single market. In this paper, we assemble a unique data set containing information on prices, quantities, and promotions throughout the entire channel in a category. Our study extends the empirical literature on pass-through in three important ways. First, we investigate how pass-through varies across more than 1,000 retailers in over 30 states. Second, we study pass-through at multiple levels of the distribution channel. Third, we show how the use of accounting metrics, such as average acquisition cost, rather than transaction cost, yields biased estimates of pass-through and therefore overstates the effectiveness of trade promotions.