We further assume that without price promotion, the consumer’s
PRIOR and POST are at $2.30. However, seeing a
price promotion in store, she will update her POST, as our
results suggest. Conditional on being in the IF or OL class, we
compute the purchase probability under each of the promotion
schedules. Different levels of promotions will also change the
size of the two classes (the coefficient for PriceDiff-Negative
is significantly positive). Accordingly, we compute the class
membership probabilities and then calculate the expected
purchase probability weighted by these probabilities. Finally,
we calculate the demand elasticity. Since the average price cut
per week is 3 % under the three promotional schemes, the
elasticity is computed as the percentage change in total purchase
probability over 5 weeks divided by −3 %