We focus on studying StarKist, the market leader‘s promotion decisions. The estimates of the demand-side model imply that there are two segments of
households in the investigated market. Households in segment one have a strong
preference over StarKist and are less promotion sensitive. We name households in this segment loyals. Households in segment two are very sensitive to promotions and have weak preference over StarKist. We name households in segment two brand switchers. Conditional on these demand characteristics, we find that it is optimal for the manufacturer to promote when the mean inventory for brand switchers is sufficiently low and the optimal discount depth decreases in the mean inventory for brand switchers. We empirically measure the extent to which forward-looking behavior by consumers affects the manufacturer‘s optimal promotion policy. We find that StarKist promotes less often
with shallower discount when consumers become myopic. StarKist benefits from
consumer‘s forward-looking behavior by allowing switchers to stockpile. Moreover, StarKist‘s profit can be greatly hurt if it assumes forward-looking consumers to be my opic.